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Sectors of the economy

Sectors of the economy

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It is important to remember that the most significant economic activity in many countries exists between businesses, rather than between businesses and consumers. This type of activity where one business sells to another is often called 'B2B' activity (Business to Business).

In this section we are looking at profit organisations - that is organisations whose main objective is usually profit maximisation. We are going to look at this in the context of starting a small firm. We will be looking at the problems of setting up a business either in manufacturing or in the tertiary sector, and examining any legal requirements.


Changes in Economic Structure

Structural change refers to adjustments in the relative importance of different sectors of an economy over time, usually measured in terms of their share of output, employment or total spending.

Since the industrial revolution, structural change in most countries involved shifts from subsistence agriculture to commercial agriculture, an increase in the relative significance of manufacturing and, at a later stage, a shift toward service industries. Structural change also involves shifts between the regions of large national economies, and changes in the composition of a country's imports and exports.

There are many models of economic development and arguments about the stages through which countries travel as they develop. None of these are really relevant to business and management except in the sense that changes in the relative significance of economic sectors will have effects on demand and employment conditions in an economy.

The IMF classifies countries into three main categories:

  1. developing countries (LEDCs)
  2. transitional or newly industrialising countries (NICs)
  3. industrial countries (MEDCs)

Generally speaking, developing countries are characterised by subsistence primary production (mainly agriculture) and low levels of income per head. As these countries develop they go through a process of Industrialisation, which refers to the move from an economy dominated by agricultural output and employment to one dominated by manufacturing. This will have the effects such as:

  • Urbanisation
  • More capital-intensive industries
  • Increases in GDP and living standards as per capita incomes increase
  • Increasing employment opportunities

As development proceeds there is a move towards tertiary or service based sector activity as the main contributor to output and employment. This will have effects such as:

  • Higher household incomes and changes in consumption patterns towards luxury goods
  • Increasing specialisation
  • An increase in demand for personal services such as financial planning, hairdressing and personal health
  • More leisure time and greater spending on industries such as entertainment, sport and travel
  • The growth of technology and communication related industries

Development does not always fit neatly into this primary to secondary to tertiary model. Some developed economies, such as New Zealand have been able to use automation to make their primary industries more efficient and several more economically developed countries, like Japan and Germany, retain a significant manufacturing base by value.

All three sectors of an economy are interdependent in the sense that each sector relies on the others. For example, the largest global manufacturers also require finance, raw materials, energy supplies and transport.

As Business and Management students you need to have an awareness of the effect on relationships within and between countries as they develop. The obvious examples are China and India. As they develop rapidly, the movement of goods and services between countries increase as do the opportunities for employment in related industries. Demand patterns will also change in relation to the accessibility of imported goods and services.