Economic sector refers to a collection of various similar economic activities. Similarities vary depending on the classification we use. It could be based on stages in the production chain, source of income or type of product, or based on ownership.
Some examples of classifications commonly used:
- Classification of three sectors: primary, secondary, and tertiary. This grouping is based on stages in the production chain. Recently, several authors have added quarterly sectors, which were previously included in the tertiary sector category
- Classification based on ownership: public vs. private
- International Standard Industrial Classification of All Economic Activities (ISIC) by the United Nations Statistics Division. This classification breaks down three sectors (primary, secondary, and tertiary) into various industry groups. Several countries usually adopt this classification with several adaptations, depending on their economic structure. An example is the North American Industry Classification System (NAIC) in the United States and Canada.
- Industry Classification Benchmark (ICB) by FTSE
- Global Industry Classification Standard (GICS) by Standard & Poor’s, Morgan Stanley Capital International
- Bloomberg Industrial Classification System by Bloomberg
For the last three, they are for listed companies in the capital market. All three facilitate investors in making investment allocation decisions in various sectors.
Economic sector classification
In this article, I will only focus on two classifications, namely classification according to three-sector theory and classification based on ownership.
Primary, secondary and tertiary sectors
The primary sector includes various economic activities related to the extraction of raw materials. Sometimes, we also call this sector the extraction sector. Examples are mining, fisheries, and agriculture.
Traditional economies usually rely on the primary sector. Then, when the economy and technology develops, the economy is headed for industrialization. Various manufactures began to grow.
The secondary sector consists of economic activities that process raw materials into finished and semi-finished goods. This sector generally refers to activities by various manufacturing companies such as food, beverages, toy cars, cars, and clothing. Apart from manufacturing, the construction industry falls into this category.
Manufacturers process raw materials into finished products with higher added value. For example, bauxite can be processed into aluminum and then used for car production.
Initially, the manufacturing industry developed from labor-intensive home business. However, along with the development of technology, they turned to capital-intensive by relying on various sophisticated machines. This transition allows manufacturers to benefit from economies of scale. They can reduce production costs and increase labor productivity.
The tertiary sector includes sectors that provide services. Examples are retail, insurance, transportation, tourism, and banking.
The quaternary sector is involved in technology production, research and development, information services, and education. This sector is vital in improving service quality and innovation in the economy. Without them, economic growth will be slow.
Public vs. private sector
The private sector represents sectors where the private sector has resources. They consist of various household businesses to large companies on an international scale. Profit maximization is their main motivation.
And, in some countries with free-market economies, their role in the economy is significant.
Types of organizations in the private sector generally take the form of:
- Sole proprietorship
- Private limited company
The public sector refers to various economic activities owned by the state. State interference may be as direct as in infrastructure development or indirectly through state-owned companies.
The government, both national and regional, owns and controls the public sector. They aim to provide services to the public and are funded by taxes, except through state-owned companies. Public sector organizations function vital in areas such as education, infrastructure, and health.
The public sector is more dominant in countries that have a command economic system such as China. In this country, the government controls and supervises various economic activities.
In addition to the public and private sectors, several classifications add up to the voluntary sector. This sector consists of a variety of social activities carried out by non-governmental organizations. Examples are charities, social enterprises, and voluntary organizations.