Sector Classification and Economic Systems

Classification of Businesses

Objectives

  • Learn about primary, secondary, and tertiary sector business activity.
  • Understand the changing importance of classifying business activity by sector for developing and developed economies.
  • Learn how business enterprises are classified in the private and public sectors.

Introduction

  • Business activity can classify all businesses in an economy.
  • An economy is a measure of all the wealth and resources in a country, including what it produces and what consumers buy.

Primary, Secondary, and Tertiary Sectors

How Businesses Are Classified

  • Businesses are classified into three sectors based on the goods and services they produce:
    • Primary sector
    • Secondary sector
    • Tertiary sector

Primary Sector

  • Involves extracting or harvesting natural resources from the land or sea.
  • Examples include:
    • Farming (e.g., rice).
    • Fishing.
    • Forestry.
    • Mining (e.g., coal, oil).
  • Often provides raw materials for secondary sector activity.
  • Some primary sector activities produce final products (e.g., raw vegetables, fruit, fish).

Secondary Sector

  • Takes natural resources from the primary sector and turns them into finished goods.
  • Activities include:
    • Refining.
    • Manufacturing.
    • Construction.
  • Examples include food canning, furniture making, car manufacturing, and house building.

Tertiary Sector

  • Involves providing services to final consumers or businesses.
  • Examples include:
    • Shops.
    • Restaurants.
    • Banks.
    • Cinemas.
    • Airlines.
  • Provides services such as retailing, finance, entertainment, and transport.

Chain of Production

  • The different sectors are often dependent on each other; this is known as a chain of production.
  • Example: Oil
    • Primary sector: Oil extraction.
    • Secondary sector: Refining oil to produce petrol or gas.
    • Tertiary sector: Bringing petrol to gas stations for sale to consumers.

Diamonds in South Africa Case Study

  • Petra Diamonds: Mining group (primary sector).
  • Mark Solomon Jewellers: Manufacturing diamond jewellery (secondary sector).
  • Browns Jewellers: Retailer of diamond jewellery (tertiary sector).

Changing Importance of Business Classification

Developed vs. Developing Countries

  • Developing countries (Less Developed Countries - LDC) often have a small industrial sector and a lower standard of living.
  • Developed countries (More Developed Countries - MDC) have high levels of industrialization and a higher standard of living.
  • The size of a country's business sectors often indicates whether it has a developing or developed economy.

Country Data for Business Activity by Sector

  • Developing Economies:
    • Rwanda: Primary (33.3%), Secondary (13.9%), Tertiary (52.9%).
    • Vietnam: Primary (21.5%), Secondary (40.7%), Tertiary (37.7%).
    • Zimbabwe: Primary (20.3%), Secondary (25.1%), Tertiary (54.6%).
  • Developed Economies:
    • Bermuda: Primary (0.7%), Secondary (7.0%), Tertiary (92.3%).
    • Japan: Primary (1.2%), Secondary (27.5%), Tertiary (71.4%).
    • Norway: Primary (2.7%), Secondary (41.5%), Tertiary (55.7%).

Reasons for Changing Importance

  • Industrialization: Growing importance of secondary sector, reduced importance of primary sector (e.g., China, India).
  • De-industrialization: Growing importance of tertiary sector, reduced importance of secondary sector (e.g., UK, USA).
  • Change in consumer behavior:
    • Higher incomes lead to demand for better quality and wider choice.
    • Better education leads to expectations of better products; e-commerce allows buying from different regions/countries.
    • More leisure time increases demand for leisure activities (e.g., cinemas, restaurants, holidays).
  • Change in business behavior:
    • Need for finance to fund expansion and compete globally.
    • Need for quick and cheap communication to take advantage of wider markets.
    • Need to provide better services for employees (e.g., canteens), increasing business demand for other businesses' goods and services.

Business Enterprises in the Private and Public Sectors

Mixed Economies

  • Most countries have mixed economies with both private and public sectors.

Private Sector

  • Businesses are owned and controlled by individuals or groups of individuals for profit (e.g., Sony, Tata Corporation, Apple).

Public Sector

  • Organizations are owned by the country and controlled by the state or government (e.g., public television and radio broadcasting services).