What it means
Economists divide activity into sectors. The primary sector extracts natural resources, such as farming and mining, the secondary sector turns materials into goods, and the tertiary sector delivers services to people and businesses.
The tertiary sector tends to grow as a country becomes richer. As incomes rise, people spend more on things like healthcare, travel, finance and entertainment, while productivity gains in farming and manufacturing mean fewer workers are needed there.
For businesses, the main characteristic of services is that they are often intangible, meaning you cannot touch them or store them. A haircut or a consulting report cannot be held in stock, which affects how companies price, schedule and measure their work.
Costs in service firms are usually dominated by people. Salaries and training make up a large share of the cost base, so revenue per employee and utilisation rates (the share of time that staff are earning fees) are key measures.
Some analysts split out a fourth or quaternary sector for knowledge-based activities such as research and information technology. Others fold these activities into the tertiary sector, so published statistics can differ.
Understanding the sector mix helps with planning and investment. A region that depends heavily on tourism, for example, will be affected differently by economic shocks than one built on manufacturing.
In practice
Real-world examples.
Example
A management consultancy reports that its revenue per employee is $240,000 a year. The firm belongs to the tertiary sector, and its main assets are the skills of its people. The finance team therefore focuses on utilisation and billing rates. She benchmarks the firm against peers on those measures.
Example
A tourism board analyses how its region's economy has changed over twenty years. Hotels, restaurants and tour operators now employ far more people than the old fishing and mining industries. The board plans investment in services training. The data guides which courses the local college should offer.
Example
An investor compares a manufacturer with a restaurant chain. The manufacturer needs heavy machinery and inventory, while the restaurants rely on staff, leases and food costs. The investor adjusts her valuation approach for each. He also checks how sensitive each business is to a downturn in consumer spending.
Formula
Calculation
Sector share of output = sector output / total output x 100
An economy has a total annual output of $500 billion, of which services produce $350 billion.
Services share = 350 / 500 = 0.70, which is 70%
If the remaining output is split with $25 billion from primary activities, the secondary sector produces 500 - 350 - 25 = $125 billion, which is 25% of the total.Case study
Seen in the real world.
Eastbrook Region is an illustrative, fictional area that once relied on a large steel plant. When the plant closed, the regional council had to reconsider how to create jobs.
Analysts found that the area had good transport links and a university, which suited services such as logistics, finance support and healthcare. The council offered training programmes and business grants to attract companies from the tertiary sector.
Within a decade, services provided about two thirds of local jobs, although incomes took longer to recover. The illustrative lesson is that a shift towards services can rebuild an economy, but it needs investment in skills. The council also tracked job numbers and average wages each year, so that it could see whether the new roles were improving living standards as well as employment. The council also published a short guide for small employers explaining the grants available, the skills courses on offer and the contacts at the university, which made it easier for new service firms to set up and hire local people.
Watch out
Common mistakes.
- Assuming tertiary industry only means low-paid jobs, when it includes highly paid areas such as finance, law and medicine. Service jobs range from cleaning and delivery to surgery and investment banking, so pay varies widely. A doctor, a lawyer or a financial adviser works in the sector and often earns above the average wage.
- Using manufacturing measures such as inventory turnover for service firms, where they have little meaning. Inventory turnover and similar measures were built for firms that hold stock, so service firms use utilisation and revenue per employee instead.
- Ignoring that service firms can still hold significant assets such as property and technology. A hotel, a hospital or a software firm may own buildings and equipment worth millions of dollars.
Questions
People also ask.
What is the difference between primary, secondary and tertiary industries?
Primary extracts resources, secondary makes goods, and tertiary provides services. Some classifications add a fourth or quaternary sector for knowledge-based work, so the boundaries are not identical everywhere.
Why is the tertiary sector growing?
As incomes rise, people spend a larger share on services, and automation reduces the labour needed to produce goods. Technology also lets service firms reach customers far from their offices, which supports growth.
Where does retail fit?
Retail is part of the tertiary sector, since it sells goods made elsewhere and provides the service of distribution.
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