What it means
Investopedia describes the service sector as the third tier of a three-sector economy. The primary sector covers farming, mining and similar activity, and the secondary sector turns raw materials into tangible goods.
The service sector sits after them and produces services such as maintenance, training, consulting, nursing and teaching. The World Bank gives a statistical definition, saying that services industries correspond to ISIC divisions 45 to 99, which include wholesale and retail trade, hotels and restaurants, transport, finance, real estate, public administration, education and health.
This is the basis for its indicator of services value added as a share of GDP. Value added is the contribution an industry makes to the economy, meaning the value of output minus the value of the inputs bought from other firms, so the sector's share of GDP is measured by value added, not by sales.
Investopedia says the sector is the largest in the global economy by value added, and is most important in advanced economies. It notes that about two-thirds of US economic activity takes place in services.
The US Institute for Supply Management publishes a monthly index of business activity in the sector, which is used as a guide to economic health. Some services are tangible, such as a meal, and others are intangible, such as advice or a concert.
The sector can be hard to scale in the same way as manufacturing, since many services need people at the point of delivery. Technology is changing this, as firms use software to raise speed and cut staffing needs.
When reading data, check which definition a source uses. Some sources include public administration and others do not, and country classifications differ.
Figures are updated each year, so use the latest release. For a business or an investor, the sector mix matters.
A service-heavy economy may react differently to a downturn than a manufacturing-heavy one. Local demand, wages and trade in services all shape the result, so look at the detail behind the headline share.
In practice
Real-world examples.
Example
A fictional country has total value added of $800 billion, of which services produce $520 billion. Services are $520 billion / $800 billion = 65% of value added. The other 35% comes from industry and farming.
Example
A fictional economy shifts over 30 years from 48% services to 63% services. That is a rise of 15 percentage points. Over the same time its share of manufacturing falls from 35% to 22%.
Example
A fictional hotel buys food and supplies worth $40 and sells stays and meals worth $100. Its value added is $100 - $40 = $60. That $60 is counted in the service sector's share of GDP, not the $100 of sales.
Formula
Calculation
Service share of GDP = Services value added / Total value added x 100.
Value added = Output - Intermediate inputs.
Change in share = New share - Old share, in percentage points.
Worked example. A fictional country has total value added of $800 billion, of which services produce $520 billion.
- Service share = $520 billion / $800 billion x 100 = 65%.
- The remaining $280 billion, or 35%, comes from industry and farming.
- A fictional hotel buys food and supplies worth $40 and sells stays and meals worth $100, so its value added is $100 - $40 = $60.
- If the service share was 48% thirty years ago and is 63% now, the change is 63% - 48% = 15 percentage points.Case study
Seen in the real world.
This case study is fictional and illustrative. Wei, 44, in Singapore, advises a fund that is comparing two countries. Country A has a service share of 72% and Country B has 48%. He checks the definitions and sees that Country A includes public administration, while Country B does not. When he puts both on the same basis, Country B rises to 55%.
He also looks at jobs, since a high share of value added does not always mean a high share of workers. He notes that the service sector includes both high-wage and low-wage work. He writes the gap as 17 points on the same basis, which is 72% - 55%. He keeps the source and the definition in his notes for the next review.
Watch out
Common mistakes.
- Comparing service shares from sources that use different definitions, such as with and without public administration.
- Assuming a large service sector means all jobs are high paid, when services range from low-wage to high-wage work.
- Mixing up share of GDP with share of employment, which can differ.
Questions
People also ask.
What is the service sector?
It is the part of the economy that produces services instead of goods. It is also called the tertiary sector.
What does the service sector include?
Trade, transport, finance, real estate, education, health, public administration and similar activities. The World Bank uses ISIC divisions 45 to 99.
How is its size measured?
By value added as a share of GDP, or by share of employment. The two measures can give different results.
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