Tertiary sector of the economy

Last updated
The product lifecycle Product's lifecycle.jpg
The product lifecycle

The tertiary sector of the economy, generally known as the service sector, is the third of the three economic sectors in the three-sector model (also known as the economic cycle). The others are the primary sector (raw materials) and the secondary sector (manufacturing).


The tertiary sector consists of the provision of services instead of end products. Services (also known as "intangible goods") include attention, advice, access, experience and affective labour.

The tertiary sector involves the provision of services to other businesses as well as to final consumers. Services may involve the transport, distribution and sale of goods from a producer to a consumer, as may happen in wholesaling and retailing, pest control or financial services. The goods may be transformed in the process of providing the service, as happens in the restaurant industry. However, the focus is on people by interacting with them and serving the customers rather than transforming the physical goods. The production of information has been long regarded as a service, but some economists now attribute it to a fourth sector, called the quaternary sector.

Difficulty of definition

It is sometimes hard to determine whether a given company is part of the secondary or the tertiary sector. It is not only companies that have been classified as part of a sector in some schemes, since governments and their services (such as the police or military), as well as nonprofit organizations (such as charities or research associations), can also be seen as part of that sector. [1]

To classify a business as a service, one can use classification systems such as the United Nations' International Standard Industrial Classification standard, the United States' Standard Industrial Classification (SIC) code system and its new replacement, the North American Industrial Classification System (NAICS), the Statistical Classification of Economic Activities in the European Community (NACE) in the EU and similar systems elsewhere. These governmental classification systems have a first-level of hierarchy that reflects whether the economic goods are tangible or intangible.

For purposes of finance and market research, market-based classification systems such as the Global Industry Classification Standard and the Industry Classification Benchmark are used to classify businesses that participate in the service sector. Unlike governmental classification systems, the first level of market-based classification systems divides the economy into functionally related markets or industries. The second or third level of these hierarchies then reflects whether goods or services are produced.

Theory of progression

For the last 100 years, there has been a substantial shift from the primary and secondary sectors to the tertiary sector in industrialized countries. This shift is called tertiarisation. [2] The tertiary sector is now the largest sector of the economy in the Western world, and is also the fastest-growing sector. In examining the growth of the service sector in the early nineties, the globalist Kenichi Ohmae noted that:

In the United States, 70 per cent of the workforce works in the service sector; in Japan, 60 per cent, and in Taiwan, 50 per cent. These are not necessarily busboys and live-in maids. Numerous of them are in the skilled category. They are earning as much as manufacturing employees, and often more. [3]

Economies tend to follow a developmental progression that takes them from heavy reliance on agriculture and mining, toward the development of manufacturing (e.g. automobiles, textiles, shipbuilding, steel) and finally toward a more service-based structure. The first economy to follow this path in the modern world was the United Kingdom. The speed at which other economies have made the transition to service-based (or "post-industrial") economies has increased over time.

Historically, manufacturing tended to be more open to international trade and competition than services. However, with dramatic cost reduction and speed and reliability improvements in the transportation of people and the communication of information, the service sector now includes some of the most intensive international competition, despite residual protectionism.

Issues for service providers

Transport service Riscio-in-avorio.jpg
Transport service
Testing telephone lines in London in 1945. Automatic Telephone Exchange- Communications in Wartime, London, England, UK, 1945 D23700.jpg
Testing telephone lines in London in 1945.

Service providers face obstacles selling services that goods-sellers rarely face. Services are intangible, making it difficult for potential customers to understand what they will receive and what value it will hold for them. Indeed, some, such as consultants and providers of investment services, offer no guarantees of the value for the price paid.

Since the quality of most services depends largely on the quality of the individuals providing the services, "people costs" are usually a high fraction of service costs. Whereas a manufacturer may use technology, simplification, and other techniques to lower the cost of goods sold, the service provider often faces an unrelenting pattern of increasing costs.

Product differentiation is often difficult. For example, how does one choose one investment adviser over another, since they are often seen to provide identical services? Charging a premium for services is usually an option only for the most established firms, who charge extra based upon brand recognition. [4] [ self-published source? ]

Examples of tertiary sector industries

Examples of tertiary industries may include:

List of countries by tertiary output

Service output as a percentage of the top producer (United States) as of 2005 2005gdpServices.png
Service output as a percentage of the top producer (United States) as of 2005

Below is a list of countries by service output at market exchange rates in 2016:

Largest countries by tertiary output in Nominal GDP, according to the IMF and CIA World Factbook, 2016
Countries by tertiary output in 2016 (billions in USD)
(01) Flag of the United States.svg  United States
(02) Flag of the People's Republic of China.svg  China
(03) Flag of Japan.svg  Japan
(04) Flag of Germany.svg  Germany
(05) Flag of the United Kingdom.svg  United Kingdom
(06) Flag of France.svg  France
(07) Flag of Italy.svg  Italy
(08) Flag of Brazil.svg  Brazil
(09) Flag of Canada (Pantone).svg  Canada
(10) Flag of India.svg  India
(11) Flag of Tanzania.svg  Tanzania
(12) Flag of Australia (converted).svg  Australia
(13) Flag of South Korea.svg  South Korea
(14) Flag of Russia.svg  Russia
(15) Flag of Mexico.svg  Mexico
(16) Flag of Turkey.svg  Turkey
(17) Flag of the Netherlands.svg  Netherlands
(18) Flag of Switzerland (Pantone).svg   Switzerland
(19) Flag of Indonesia.svg  Indonesia
(20) Flag of Belgium (civil).svg  Belgium

The twenty largest countries by tertiary output in 2016, according to the IMF and CIA World Factbook.

See also

Related Research Articles

<span class="mw-page-title-main">Industry (economics)</span> Economic branch that produces raw materials, goods and/or services

In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services. For example, one might refer to the wood industry or to the insurance industry.

<span class="mw-page-title-main">Secondary sector of the economy</span> Manufacturing and construction industries

In macroeconomics, the secondary sector of the economy is an economic sector in the three-sector theory that describes the role of manufacturing. It encompasses industries that produce a finished, usable product or are involved in construction.

<span class="mw-page-title-main">Service (economics)</span> Transactional leadership group involving no transferal of physical goods

A service is an act or use for which a consumer, firm, or government is willing to pay. Examples include work done by barbers, doctors, lawyers, mechanics, banks, insurance companies, and so on. Public services are those that society as a whole pays for. Using resources, skill, ingenuity, and experience, service providers benefit service consumers. Services may be defined as intangible acts or performances whereby the service provider provides value to the customer.

<span class="mw-page-title-main">Health care</span> Prevention of disease and promotion of wellbeing

Health care, or healthcare, is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health professionals and allied health fields. Medicine, dentistry, pharmacy, midwifery, nursing, optometry, audiology, psychology, occupational therapy, physical therapy, athletic training, and other health professions all constitute health care. The term includes work done in providing primary care, secondary care, and tertiary care, as well as in public health.

<span class="mw-page-title-main">Industrial society</span> Society driven by the use of technology to enable mass production

In sociology, an industrial society is a society driven by the use of technology and machinery to enable mass production, supporting a large population with a high capacity for division of labour. Such a structure developed in the Western world in the period of time following the Industrial Revolution, and replaced the agrarian societies of the pre-modern, pre-industrial age. Industrial societies are generally mass societies, and may be succeeded by an information society. They are often contrasted with traditional societies.

<span class="mw-page-title-main">Healthcare industry</span> Economic sector focused on health

The healthcare industry is an aggregation and integration of sectors within the economic system that provides goods and services to treat patients with curative, preventive, rehabilitative, and palliative care. It encompasses the creation and commercialization of products and services conducive to the preservation and restoration of well-being. The contemporary healthcare sector comprises three fundamental facets, namely services, products, and finance. It can be further subdivided into numerous sectors and categories and relies on interdisciplinary teams of highly skilled professionals and paraprofessionals to address the healthcare requirements of both individuals and communities.

The economic concept of a capital good is as a "...series of heterogeneous commodities, each having specific technical characteristics ..." in the form of a durable good that is used in the production of goods or services. Capital goods are a particular form of economic good and are tangible property.

<span class="mw-page-title-main">Post-industrial society</span> Society whose service sector provides more economic value than manufacturing

In sociology, the post-industrial society is the stage of society's development when the service sector generates more wealth than the manufacturing sector of the economy.

<span class="mw-page-title-main">Quaternary sector of the economy</span> Sector of an economy based on knowledge and skill

The quaternary sector of the economy is based upon the economic activity that is associated with either the intellectual or knowledge-based economy. This consists of information technology; media; research and development; information-based services such as information-generation and information-sharing; and knowledge-based services such as consultation, entertainment, broadcasting, telecommunication, education, real estate, information technology, pharmacy, healthcare/hospitals, financial planning, blogging, waste disposal, and designing. Other definitions describe the quaternary sector as pure services. This may consist of the entertainment industry, to describe media and culture, and government. This may be classified into an additional quinary sector.

Labor intensity is the relative proportion of labor used in any given process. Its inverse is capital intensity.

Articles in economics journals are usually classified according to JEL classification codes, which derive from the Journal of Economic Literature. The JEL is published quarterly by the American Economic Association (AEA) and contains survey articles and information on recently published books and dissertations. The AEA maintains EconLit, a searchable data base of citations for articles, books, reviews, dissertations, and working papers classified by JEL codes for the years from 1969. A recent addition to EconLit is indexing of economics journal articles from 1886 to 1968 parallel to the print series Index of Economic Articles.

The industrial policy of Japan was a complicated system devised by the Japanese government after World War II and especially in the 1950s and 1960s. The goal was to promote industrial development by co-operating closely with private firms. The objective of industrial policy was to shift resources to specific industries in order to gain international competitive advantage for Japan. The policies and methods were used primarily to increase the productivity of inputs and to influence, directly or indirectly, industrial investment.

<span class="mw-page-title-main">Energy industry</span> Industries involved in the production and sale of energy

The energy industry is the totality of all of the industries involved in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution. Modern society consumes large amounts of fuel, and the energy industry is a crucial part of the infrastructure and maintenance of society in almost all countries.

Service industries are those not directly concerned with the production of physical goods . Some service industries, including transportation, wholesale trade and retail trade are part of the supply chain delivering goods produced in the agricultural and manufacturing sectors to final consumers.

The following outline is provided as an overview of and topical guide to industry:

<span class="mw-page-title-main">Three-sector model</span> Model in economics

The three-sector model in economics divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and service industries which exist to facilitate the transport, distribution and sale of goods produced in the secondary sector (tertiary). The model was developed by Allan Fisher, Colin Clark, and Jean Fourastié in the first half of the 20th century, and is a representation of an industrial economy. It has been criticised as inappropriate as a representation of the economy in the 21st century.

<span class="mw-page-title-main">Economic sector</span> Economical term

One classical breakdown of economic activity distinguishes three sectors:

Service innovation is used to refer to many things. These include but not limited to:

  1. Innovation in services, in service products – new or improved service products. Often this is contrasted with “technological innovation”, though service products can have technological elements. This sense of service innovation is closely related to service design and "new service development".
  2. Innovation in service processes – new or improved ways of designing and producing services. This may include innovation in service delivery systems, though often this will be regarded instead as a service product innovation. Innovation of this sort may be technological, technological - or expertise -based, or a matter of work organization.
  3. Innovation in service firms, organizations, and industries – organizational innovations, as well as service product and process innovations, and the management of innovation processes, within service organizations.

Industry classification or industry taxonomy is a type of economic taxonomy that classifies companies, organizations and traders into industrial groupings based on similar production processes, similar products, or similar behavior in financial markets.

The following outline is provided as an overview of and topical guide to production:


  1. R.P. Mohanty & R.R. Lakhe (1 January 2001). TQM in the Service Sector. Jaico Publishing House. pp. 32–33. ISBN   978-81-7224-953-3 . Retrieved 1 May 2013.
  2. Definition by the European Foundation for the Improvement of Living and Working Conditions Archived July 20, 2014, at the Wayback Machine
  3. The Borderless World: Power and Strategy in the Interlinked Economy.
  4. De Soto, Glenn (2006). Fragmented: the Demise of Unionized Construction. Lulu.com. p. 64. ISBN   9781847285775.[ self-published source ]