Tertiary sector of the economy

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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 labor. 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.

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 entertainment. 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.

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]

In order 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 percent of the workforce works in the service sector; in Japan, 60 percent, and in Taiwan, 50 percent. These are not necessarily busboys and live-in maids. Many of them are in the professional category. They are earning as much as manufacturing workers, and often more. [3]

Economies tend to follow a developmental progression that takes them from a 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

Surgery team at work FirstIncision.JPG
Surgery team at work
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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 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 Spain.svg  Spain
(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.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

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  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 ]