2 Classification of businesses

This chapter will explain:

• the differences between primary, secondary and tertiary production •
the reasons for the changing importance of business classification, for
example, in developed and developing economies • the differences
between public sector and private sector business enterprises in a
mixed economy.

Stages of economic activity

As you read this book you are probably sitting at a desk or table. Most
tables are made of wood. How many different types of businesses
might have been involved in converting the wood into a finished table
ready to be sold to a final consumer? What stages of production has
the wood passed through to arrive at the finished table?
The diagram below shows the most likely stages in the production
and sale of a wooden table.
The stages involved in making and selling a wooden table

You will notice that there are three main stages from the cutting down
of the timber to the sale of the completed table. These stages are
typical of nearly all production and they are called the levels of
economic – or business – activity.
Stage 1 is called the primary stage of production. This stage
involves the Earth’s natural resources. Activities in the primary
sector of industry include farming, fishing, forestry and the extraction
of natural materials, such as oil and copper ore.
Stage 2 is called the secondary stage of production. This stage
involves taking the materials and resources provided by the primary
sector and converting them into manufactured or processed goods.
Activities in the secondary sector of industry include building and
construction, aircraft and car manufacturing, computer assembly,
bread baking.
Examples of activities in the different sectors of industry: rice farming in
Vietnam, clothes production in China and retailing in Kenya

Stage 3 is called the tertiary stage of production. This stage involves

providing services to both consumers and other businesses. Activities
in the tertiary sector of industry include transport, banking, retail,
insurance, hotels and hairdressing.

The three types of business activity

Activity 2.1
Copy this table. Indicate with a tick which sector of industry each
business is in.
Relative importance of
economic sectors
Which sector of industry is most important in your country? This
depends on what is meant by ‘important’. Usually the three sectors of
the economy are compared by:
• percentage of the country’s total number of workers employed in
each sector
or
• value of output of goods and services and the proportion this is of
total national output.
In some countries, primary industries such as farming and mining
employ many more people than manufacturing or service industries.
These tend to be countries – often called developing countries –
where manufacturing industry has only recently been established. As
most people still live in rural areas with low incomes, there is little
demand for services such as transport, hotels and insurance. The
levels of both employment and output in the primary sector in these
countries are likely to be higher than in the other two sectors.
In countries which started up manufacturing industries many years
ago, the secondary and tertiary sectors are likely to employ many more
workers than the primary sector. The level of output in the primary
sector is often small compared to the other two sectors. In economically
developed countries, it is now common to find that many manufactured
goods are bought in from other countries. Most of the workers will be
employed in the service sector. The output of the tertiary sector is often
higher than the other two sectors combined. Such countries are often
called the most developed countries.
Case study: Comparing the three economic sectors –
India and Papua New Guinea
The relative importance of the three economic sectors in India is very
different to that in Papua New Guinea. India does not have large
reserves of primary products (natural resources), whereas Papua New
Guinea is rich in mineral deposits including copper, gold and oil and
also has extensive forests covering much of the country producing
timber products. Extracting these valuable resources makes a huge
contribution to the economy of Papua New Guinea.
India’s textile, steel and car manufacturing industries are rapidly
growing, but the secondary sector in Papua New Guinea is small –
palm oil processing, plywood production and wood chip production
are the most important secondary industries. If Papua New Guinea
developed a furniture industry making tables and chairs from the
timber extracted from its forests, secondary production could
increase.
The tertiary sector is expanding in both countries – tourism is
starting to gain importance in Papua New Guinea but it is still in its
early stages of development and its main service industries are
linked to the transport and export of its minerals. Providing IT
services to businesses all over the world is India’s largest service
industry.

Activity 2.2
Refer to the case study above.
a Explain what ‘tertiary production’ means by using examples from
the case study.
b Explain two reasons why the primary sector is relatively more
important to Papua New Guinea than to India.
c In 2017, it was estimated that 47 per cent of Indians worked in the
primary sector – mainly in agriculture. Why was this sector the
least important of the three in terms of output?
d Discuss the likely impact on Papua New Guinea if its copper and
gold mines become exhausted (the copper and gold runs out!).
Changes in sector importance
In the UK and other developed economies there has been a decline in
the importance of manufacturing industry – or the secondary sector –
since the 1970s. The tertiary sector in the UK now employs well over
75 per cent of all workers. Many workers who lost jobs as factories
closed have found it difficult to obtain work in the service industries.
The decline in the manufacturing or secondary sector of industry is
called de-industrialisation.

Key info
South Korea is one of the best examples of a country which has
experienced changes in the importance of industrial sectors. In the
1950s the economy was dependent on agriculture. By 2017
agriculture and other primary industries accounted for just 4% of
GDP, with manufacturing (secondary) responsible for 42% of output.
Service industries (tertiary) produced 54% of total output.

In China and India, the relative importance of the secondary sector

has increased since the 1980s, compared to the primary sector.
However, in both countries, many of the tertiary sector industries are
now expanding more rapidly than those in both the primary and
secondary sectors. There are several reasons for changes in the
relative importance of the three sectors over time:
• Sources of some primary products, such as timber, oil and gas,
become depleted. This has been true for Somalia with the cutting
down of most of its forests.
• Most developed economies are losing competitiveness in
manufacturing to newly industrialised countries such as Brazil, India
and China.
• As a country’s total wealth increases and living standards rise,
consumers tend to spend a higher proportion of their incomes on
 services such as travel and restaurants than on manufactured
products produced from primary products.
Case study: Bangladesh – the importance of
economic sectors over time
In 1970, Bangladesh had an economy largely based on agriculture.
A high proportion of the population worked in farming, either to
produce crops for their own consumption or to sell in local markets.
Secondary manufacturing activities were not very important and the
tertiary sector was also small as incomes were very low and people
had little spare cash to spend on ‘services’.
By 2017, Bangladesh had undergone significant changes.
Although 40 per cent of the workforce still works in agriculture,
primary production of goods such as jute, tobacco and food has
fallen in relative terms. Manufacturing industries – mainly food
processing and clothing – have expanded rapidly. Tertiary services
such as telecommunications, transport and finance now contribute
approximately half of total national output.
Economic sectors in Bangladesh – World Bank estimates of %
share of GDP

Activity 2.3
Refer to the case study above.
a Explain two possible reasons why the relative importance of
primary output has fallen.
b Would workers who formerly worked in agriculture find it easy to
obtain jobs in the secondary or tertiary sectors of industry?
Explain your answer.
c What do you expect to happen to the relative importance of
tertiary industries if incomes continue to rise in Bangladesh?
Explain your answer.
Key info
Mexico now has nearly 25 per cent of its labour force employed in
manufacturing and it is making a major contribution to the changing
economy of the country. Its secondary sector produces over a third of
its $2.2 trillion GDP. It is now the USA’s second-largest export market
and third-largest source of imports. The main secondary industry is
car manufacturing, as it cannot only export to the USA but also to
Asia, Australia and New Zealand from ports on the Pacific coast.
However, aerospace manufacturing is growing at 20 per cent per
year, it is the fifth-largest exporter of medical devices in the world, and
its domestic appliances such as refrigerators, washers and TVs make
up half of all retail sales of appliances sold in the USA.

Mixed economy
Nearly every country in the world has a mixed economy with private
sector and a public sector:
• Private sector – businesses not owned by the government. These
businesses will make their own decisions about what to produce,
how it should be produced and what price should be charged for it.
Most businesses in the private sector will aim to make a profit. Even
so, there are likely to be some government controls over these
decisions and these are explained in later chapters in this book.
• Public sector – government (or state) owned and controlled
businesses and organisations. The government, or other public
sector authority, makes decisions about what to produce and how
much to charge consumers. Some goods and services are provided
free of charge to the consumer, such as state health and education
services. The money for these comes not from the user but from the
taxpayer. Objectives of private sector and public sector businesses
are often different (see Chapter 4).

Study tips
It is useful to remember that different patterns of economic/business
activity often exist between ‘low-income’ or ‘high-income’ countries.
Which business activities are usually
in the public sector?
In many countries the government controls the following important
industries or activities:
• health
• education
• defence
• public transport
• water supply
• electricity supply.

Activity 2.4
For each of the examples of key industries or activities listed above,
suggest three possible reasons why the government of a country
might decide to own and control that industry or service.

Activity 2.5
Find out whether, in your own country, the government owns and
controls the following businesses:
a railway system
b local bus services
c water supply
d electricity supply
e TV and radio stations
f hospitals.
Mixed economies – recent changes
In recent years, many governments have changed the balance
between the private sector and the public sector in their economies.
They have done this by selling some public sector businesses – owned
and controlled by government – to private sector businesses. This is
called privatisation. In many European and Asian countries the water
supply, electricity supply and public transport systems have been
privatised.
 Why have governments done this? It is often claimed that private
sector businesses are more efficient than public sector businesses.
This might be because their main objective is profit and therefore
costs must be controlled. Also, private sector owners might invest
more capital in the business than the government can afford.
Competition between private sector businesses can help to improve
product quality.
However, a business in the private sector might make more workers
unemployed than a public sector business in order to cut costs. A
private sector business is also less likely to focus on social objectives.
Changes in the balance between the private sector and the public
sector are likely to continue in many mixed economies.

Study tips
The advantages and disadvantages of the private sector are useful
to remember.
Activity 2.6
Your government is considering the privatisation of your country’s
postal service. You decide to write to the government minister in
charge, explaining your views on this matter and stating your
opinion. Your letter should contain:
• an explanation of the difference between private sector businesses
and public sector businesses
• the possible benefits of the postal service being in the private
sector
• the possible disadvantages of the postal service being in the
private sector
• your recommendation to the minister on whether to keep the postal
service in the public sector or not.

Study tips
Do not confuse ‘privatisation’ with ‘converting a sole trader into a
private limited company’. Sole traders and private limited companies
are both examples of private sector businesses (see Chapter 4).
REVISION SUMMARY
Sectors of industry

International business in focus

Tourism in Mauritius
Mauritius is a small island in the Indian Ocean with a land area of just
2
2000 km . The Mauritian economy is dominated by the tertiary sector.
In 2017, tourism, finance and other services accounted for 74 per cent
of total national output (gross domestic product). In contrast, the
secondary sector accounted for 22 per cent and primary industries –
mainly sugar production – just 4 per cent. The government is planning
for 2 million foreign visitors and the number of tourists is increasing by
9 per cent per year. These tourists spend a great deal of money on
food, drink, travel and holiday gifts.
Air Mauritius is one of the businesses that has benefited greatly from
the expansion of tourism in the country. The airline is partly owned by
private owners and the Mauritian Government. It has won the ‘Indian
Ocean’s Leading Airline’ prize ten times in recent years.
Air Mauritius not only has an extensive network of air routes but it also
offers services to other airlines operating in the region and owns
holiday companies such as Mauritian Holidays UK. There are
hundreds of hotels and guesthouses in Mauritius and these employ
many local workers. Some of the largest hotel groups in the world
operate in Mauritius, such as Radisson and Le Meridien.

Discussion points
• Why do you think the primary sector of the Mauritian economy is
relatively small?
• Explain three ways in which tertiary sector industries contribute to
the Mauritian economy.
• Do you think that increasing numbers of tourists will bring only
benefits to Mauritius?
• Why do you think the Mauritian Government still owns a part of Air
Mauritius?
Exam-style questions: Short answer and
data response
1 Ade’s Engineering Company (AEC) makes parts for cars and
trucks. These are sold to car manufacturers in many countries. The
parts include metal brake components and rubber seals to fit
 around windows. AEC operates in Country X, which, until a few
years ago, had an economy dominated by agriculture and coal
mining. Over the last 20 years the relative importance of the
primary sector has declined. To be successful AEC requires natural
resources to make car parts and services provided by other
businesses. Consumer incomes are rising rapidly in Country X.
a Define ‘primary sector’.
[2]
b Identify two examples of services that a business such as AEC
requires.
[2]
c Outline two reasons why a business such as AEC could not be
successful without other firms providing natural resources.
[4]
d Explain two likely reasons why the relative importance of the
primary sector of Country X’s economy has declined.
[6]
e A government minister in Country X recently said: ‘The secondary
sector of industry will always be more important than the tertiary
sector to our economy.’ Do you agree with this view? Justify your
answer.
[6]
2 The government of Country Y owns and controls many
businesses. ‘The public sector always produces goods and
services more efficiently than privately owned businesses,’ a
government minister recently said. Other ministers disagree and
want to privatise many state-owned businesses. The private sector
businesses in Country Y produce 55 per cent of total output – mainly
in services such as transport, tourism and finance. The secondary
sector of industry produces 35 per cent of total output. a Define
‘public sector’.
[2]
b Identify two industries in the secondary sector.
[2]
 c Outline two reasons why the tertiary sector of industry is
becoming more important in most economies.
[4]
d Explain two possible reasons why some ministers want to
privatise some businesses in the public sector.
[6]
e Do you agree with the government minister’s view that: ‘The
public sector always produces goods and services more
efficiently than privately owned businesses’? Justify your
answer.
[6]

Revision checklist
In this chapter you have learned:
the differences between the three sectors of economic/business
activity
the reasons why these sectors vary in importance between
countries
the reasons why these sectors vary in importance over time
the differences between the private sector and public sector in
mixed economies.
NOW – test your understanding with the revision questions in the
Student etextbook and the Workbook.
Definitions to learn
The primary sector of industry extracts and uses the natural
resources of Earth to produce raw materials used by other
businesses.
The secondary sector of industry manufactures goods using the
raw materials provided by the primary sector.
The tertiary sector of industry provides services to consumers and
the other sectors of industry.
De-industrialisation occurs when there is a decline in the
importance of the secondary, manufacturing sector of industry in a
country.
A mixed economy has both a private sector and a public (state)
sector.
Capital is the money invested into a business by the owners.