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Service Sector

Sector of the economy that produces and offers services

What is the Service Sector?

The service sector is the sector of the economy that produces and offers services. According to the tri-sector macroeconomic theory, there are three major economic sectors – primary, secondary, and tertiary.

 

Service Sector

 

Summary

  • The service sector is the part of the economy that provides various services, as opposed to providing tangible goods such as cars and televisions.
  • The service sector is the largest sector of the economy in developed nations.
  • The rapid growth of service-related industries has been fueled by increases in knowledge and by rapid technological advances – especially improvements in communication.

 

Major Economic Sectors

 

1. Primary Sector

The primary sector is composed of industries engaged in the business of gathering raw materials. It includes mining companies, lumber companies, and oil drilling companies – along with the agricultural and fishing industries.

 

2. Secondary Sector

The secondary sector includes all businesses involved in producing and selling goods – such as auto manufacturers, furniture stores, and clothing retailers.

 

3. Tertiary Sector

The tertiary sector is the service sector. It includes industries such as the financial services industry, internet technology (IT), and the healthcare and entertainment industries.

 

Some economists include a fourth sector – the quaternary sector in which they assign the areas of research, information technology, education, consulting, and various other elements of what has come to be known as the “knowledge-based economy.”

The knowledge-based economy is focused on utilizing information and communications (such as social media) to provide goods and services specifically tailored to the needs and wants of individual customers or clients.

An example of the knowledge-based economy in action is a retailer, such as Amazon or Walmart, sending you tailor-made ads for goods or services that your previous purchases or searches indicate that you are interested in.

Economists who do not use a fourth economic sector category assign the quaternary sector industries to the service sector.

 

Economic Development

The tri-sector economic theory holds that the three economic sectors, in addition to delineating different areas of economic endeavor, also reflect how economies develop over time.

The most primitive economies consist almost solely of the primary economic activities related to raw materials, agricultural production, and fishing. As economies grow and develop, the manufacturing and marketing of finished goods account for the largest portion of economic activity.

Service industries are the last economic sector to experience significant growth and are the hallmark of developed nations and advanced economies.

 

The Primacy of the Service Sector

The fact that the service sector is designated as the tertiary sector should not be in any way taken to mean that it occupies third place in terms of economic importance.

Over the past century, the service sector has rapidly expanded. By the turn of the 21st century, it had eclipsed the manufacturing and retail goods sector as the largest sector of the economy in most developed nations.

Whereas in the early part of the 20th century, the United States became the dominant world economy, thanks to its massive manufacturing industry; by the early part of the 21st century, its worldwide economic dominance was based on its massive service sector.

In the U.S., between 1919 and 2019, the service sector grew from accounting for less than 50% of the country’s gross domestic product (GDP) to generating roughly 85% of the country’s GDP.

The explosion of the service sector has been made possible by the exponential increase in knowledge that has occurred over the past 50 to 70 years, the rapid growth of technology, and the development of instantaneous, worldwide communication through internet connections and cell phones.

Increased automation, which reduces the number of people required for manufacturing processes, is also a key element in the shift from a manufacturing-based economy to a service-based economy.

The massive expansion of government services in developed nations is another significant contributing factor to the increasing predominance of the service sector.

 

Examples of Service Industries

 

Examples of Service Industries

Many people do not realize the huge number of businesses and industries that combine to make up the service sector.

But if you stop and take some time to think about all the various service-related businesses, then it becomes very easy to see why the service sector is, by far, the largest sector of the economy in developed nations such as the US, the UK, Canada, Australia, Germany, and Japan.

The following are brief descriptions of just a few of the many businesses that comprise some of the major industries contained within the service sector.

 

1. Travel Industry

The travel industry goes way beyond just the offices of travel agents and major airlines. It also includes the rapidly growing operations of public transportation, such as subways and city buses. Uber, Lyft, and Airbnb – major businesses that didn’t even exist a mere 20 years ago – are part of the travel industry.

Additionally, the countless tourist attractions such as museums, recreation parks, national parks – such as Yellowstone and the Grand Canyon – concert halls, and art galleries, along with the tens of thousands of local tourist attractions spread throughout the country, are included in the travel industry.

Hotels, motels, and the entire hospitality industry are also considered part of the travel and tourism industry.

 

2. Information Technology Industry

The IT industry is composed of virtually anything and everything related to computers, information, communication technology, and software – except for the manufacturing of necessary hardware such as computers themselves.

The whole gamut of social media – from Facebook to Twitter to Instagram and YouTube – encompasses literally millions of individual businesses. Did you know that, as of 2019, more than 30 million YouTube channels were originating in the US?

Online education, one of the most rapidly growing industries worldwide, also falls under the broad umbrella of the information technology industry.

 

3. Media and Entertainment Industry

Technological inventions and advancements have also created a huge expansion of the media and entertainment industry. News used to be distributed by radio stations, print newspapers, and network television channels.

The rise of cable and satellite TV has given birth to an entertainment world that contains dozens of different news channels. For example, Fox, CNN, and NBC not only provide 24-hour news programs, but they even have separate business news channels.

Online news and information websites are far too numerous to count. There are vastly more “made-for-television” movies produced every year than the number of films produced by all the major motion picture studios and production companies.

People can spend their entire day watching online entertainment provided by YouTube or Pinterest or playing video games on their Xbox or PlayStation. Among the lucrative newer occupations are those of video game and app developers, social media consultants, and graphic website designers.

 

The brief descriptions above, which are nowhere close to being exhaustive, give us just a small sense of how truly massive the service sector of our economy is – and we didn’t even mention the multi-billion dollar healthcare, sports, and financial services industries.

Fintech (financial technology) businesses – another economic entity that has only come into being since the turn of the century – alone are nearly a $150 billion industry as of 2018 and are expected to surpass $300 billion in market value by 2022.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Knowledge Economy
  • Telecommunications Industry
  • Development Economics
  • Market Economy

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