Businesses in the same or similar business activities, products, or services form sectors in the economy. Sectors usually present a large group of companies that are involved in similar business activities.
Examples of sectors include the extraction of natural resources and mining.
Dividing economies into sectors help economists judge the condition of the businesses that are included in the sectors. They can understand whether businesses in a sector are expanding or contracting by analyzing sectors. This is specifically called sector analysis.
In financial markets, sectors are further divided into sub-sectors, such as technology, financial services, realty, etc. These sub-sectors are called investment sectors. Dividing sectors into sub-sectors help investors and economists monitor the activities in these sub-sectors more closely which helps in forecasting and decision-making regarding investments in stocks and shares of selected sub-sectors.
Sectors are meant to classify economic activity by dividing them into various groups. While one sector may include the earliest stages of the business cycle, other sectors may be formed for activities that are related to later stages of the business. For example, the extraction of raw materials is the earliest phase of a specific sector while using these raw materials in manufacturing may represent another sector.
Developing or emerging economies usually have a few sectors in their economy.
For example, some developing nations have a sector for the extraction and sale of crude oil. The developed nations on the other hand have more sectors in their economy. For example, while most African economies are involved in the extraction of raw materials, the US economy has a representation of energy, technology, financial services, and other sectors of the economy. So, we may conclude that the more the number of sectors in the economy the better the chances of the economy to get developed.
Economic sectors are divided into four categories which are the following:
Let us see each one in detail below.
The companies in the primary sector are involved in the extraction and harvesting of natural products or raw materials from the Earth. They do not engage in the production of anything new. These companies sell the extracted raw materials to consumers for commercial or business purposes.
It is notable that companies that process and pack raw materials are also included in the primary sector category.
The primary sector includes business activities in the areas of agriculture,k fishing, quarrying, mining, forestry, and hunting. It has been observed that developing nations fall majorly in the primary sector of economic activities. They are primarily involved in the extraction and use of primary resources that are available naturally more than in developed economies.
The secondary sector of economies is engaged in the production of goods with the resources collected in the primary sector. This sector comprises mainly manufacturing, processing, and construction firms. It should be noted that the companies in the secondary sector are dependent on the primary sector for its well-functioning.
The business activities included in the secondary sector are shipbuilding, automobile manufacturing, textile, chemical engineering, aerospace, space, and energy utilities. The secondary sector of economies is more advanced than the primary sector in general. Moreover, the secondary sector requires the use of more modern technologies for its existence. That is why businesses in the secondary sector are more available in developed economies.
The tertiary sector is engaged with service providers that include financial organizations, entertainment firms, and retailers. The tertiary sector firms sell the goods manufactured in the secondary sector and offer the services associated with them. Therefore, the tertiary sector is related to the secondary sector for its survival.
The services offered by the tertiary sector include transportation, retail sales, distribution, restaurants, tourism, healthcare, banking and insurance, and legal services.
This sector of the economy mainly deals with intellectual services and properties. It involves technological research and development. Technological advancement and innovation drive the quaternary sector and lets the sector gain momentum in the direction of new product development, and implementation of new regulations for the new products obtained through research and development.
The companies in the quaternary sector use information and technology to innovate, create and develop new products. The quaternary sector was traditionally part of the tertiary sector, but with the expansion of the knowledge-based economy and technological impetus, a separate sector was created for ease of understanding the economic impacts.
The quaternary sector involves business activities which include research and development (R&D), information technology (IT), consulting, and education.
Although the terms industry and sector are used interchangeably, they have a slight difference in meaning. The sector is a larger part of a group of companies while industry refers to a more specific one. Therefore, in general, the sector refers to a larger segment.
While there may be confusion when differentiating sector and industry, one must remember that sector divided the economy into some large segments while industry refers to a specific type of business. In the financial market, the sector is considered to be a broad classification while the industry is considered to be a more specific one.
A sector is a more general categorization of the economy. As mentioned above an economy can be completely covered by considering a dozen or so sectors. These sectors can then be looked upon generally for easier references to get insight. Therefore, sectors are larger segments of the economy that represents one or more industry. Sectors are divided mainly into four types as mentioned above.
By the term industry, economists divide the sectors into further smaller classifications. This is done by breaking down sectors into more defined groups. Therefore, the industry refers to a more specific group. For example, each of the dozen sectors may have hundreds of industries in them.
For instance, the financial services sector can be broken down into industries such as banking, insurance, and asset management companies. The notable feature here is that companies of the same industry compete with one another. For example, banks will compete among themselves to acquire more clients while insurance companies will look for more insurance clients, but banks and insurance won’t look for the same client.
The industries can be categorized into more distinct forms. For example, the insurance industry can be categorized into auto, life, and general insurance.
Investors in the stock market look at different industries while investing. Investors often overlook sectors as it shows too broad insights. Instead, the industries offer a steadier insight into the performance of the companies. Moreover, companies in the same industry are affected by the same factors.
Dividing the economies into sectors help economists get an easier reference to the health of the economy. A sector is different from an industry although both are sometimes used interchangeably. The sector being the larger part of the economy, it contains various industries in it. Studying the sectors is considered important because it shows the general condition of the economy at a larger point of consideration.
Q1. Between sector and industry, which is the larger part?
Ans. The Sector is the larger part of an economy and it contains the industries in it.
Q2. What is the treason for dividing the economy into sectors?
Ans. The reason for an economy to be divided into sectors is to have a general understanding of the health of the economy.
Q3. How many types of sectors are there in an economy?
Ans. There are four types of sectors - primary, secondary, tertiary, and quaternary in an economy.
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