What Is an Economic Sector and How Do the 4 Main Types Work? (2023)

What Is a Sector?

A sector is an area of the economy in which businesses share the same or related business activity, product, or service. Sectors represent a large grouping of companies with similar business activities, such as the extraction of natural resources and agriculture.

Dividing an economy into different sectors helps economists analyze the economic activity within those sectors. As a result, sector analysis provides an indication as to whether an economy is expanding or if areas of an economy are experiencing contraction.

In the financial markets, economic sectors are broken down even further into sub-sectors called investment sectors. Investment sectors represent a grouping of companies with similar business activities. Examples of investment sectors include technology, energy, and financial services.

This article explores the main types of economic sectors and the business activity associated with them, and how investment sectors play a role in determining a nation's economic conditions.

Key Takeaways

  • Sectors are used to categorize the economic activity of consumers and businesses into groupings based on the type of business activity.
  • Primary sector companies are directly engaged in activities utilizing natural resources, such as mining and agriculture.
  • Secondary sector companies produce goods derived from the products within the primary sector and include manufacturing.
  • Tertiary and quaternary sectors represent the services and knowledge-based economy and include retail and information technology.
  • In the financial markets, investment sectors are sub-sectors that aid in comparing the financial performance of similar businesses.

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Sector

Understanding Sectors

Sectors are used by economists to classify economic activity by grouping companies that are engaged in similar business activities. For example, some sectors are engaged in activities that involve the earliest stages of the production cycle, such as extracting raw materials. Other sectors involve the manufacturing of goods using those raw materials. Still, other companies are engaged in service activities.

Developing and emerging economies tend to have only one or two sectors that define most business activities. For example, some nations rely heavily on the extraction and sale of crude oil, which can be turned into gasoline and sold to consumers within developed economies. On the other hand, developed nations tend to have a more diverse representation of all sectors.

Although there is some debate about the true number of sectors that represent business activity in an economy, typically, sectors are broken out into four main categories. However, please bear in mind that there can also be sub-sectors within each of the four major sectors listed below.

Primary Sector

The primary sector involves companies that participate in the extraction and harvesting of natural products from the Earth. Primary sector companies are typically engaged in economic activity that utilizes the Earth's natural resources, which are sold to consumers or commercial businesses.

Companies involved in the processing and packaging of raw materials are also categorized within the primary sector.

Primary sector business activities include the following:

  • Mining and quarrying
  • Fishing
  • Agriculture
  • Forestry
  • Hunting

Emerging economies tend to have a higher amount of economic activity and employment concentrated within the primary sector versus more advanced economies. On the other hand, developed nations tend to utilize machinery and technology in their primary sector activities, meaning the primary sector doesn't represent a large portion of the population's employment.

Secondary Sector

The secondary sector consists of processing, manufacturing, and construction companies. The secondary sector produces goods from the natural products within the primary sector. The secondary sector includes the following business activities:

  • Automobile production
  • Textile
  • Chemical engineering
  • Aerospace space
  • Shipbuilding
  • Energy utilities

Tertiary Sector

The tertiary sector is comprised of companies that provide services, such as retailers, entertainment firms, and financial organizations.

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The tertiary sector provides services to businesses and consumers by selling the goods that are manufactured by companies in the secondary sector. The types of services provided by the tertiary sector include:

  • Retail sales
  • Transportation and distribution
  • Restaurants
  • Tourism
  • Insurance and banking
  • Healthcare services
  • Legal services

Quaternary Sector

The quaternary sector includes companies engaged in intellectual activities and pursuits. The quaternary sector typically includes intellectual services such as technological advancement and innovation. Research and development that leads to improvements to processes, such as manufacturing, would fall under this sector.

The companies and firms within the quaternary sector had been traditionally part of the tertiary sector. However, with the growth of the knowledge-based economy and technological advancements, a separate sector was created.

Firms within the quaternary sector use information and technology to innovate and improve processes and services, leading to enhancements in economic development. Firms within the quaternary sector might be engaged in the following business activities:

  • Research and development
  • Information technology (IT)
  • Education
  • Consulting services

Stock and Investment Sectors

In the financial markets, the economic sectors are broken down into sub-sectors to help investors compare companies with similar business activities. While economic sectors represent a broad representation of the economy, investment sectors further define and categorize companies.

Investment sectors are important because they help measure how well an economy is performing based on the financial performance of the corporations within that sector. The list below does not represent an exhaustive list, but here are some examples of investment sectors:

  • Technology, such as electronics and software developers
  • Financial services, such as banks and insurance companies
  • Real Estate, such as residential and commercial real estate
  • Industrials, such as manufacturing, machinery, and construction
  • Energy, which includes the production and supply of energy
  • Utilities, such as water, electric, and gas companies
  • Consumer discretionary, which represents non-essential goods
  • Consumer staples, which represents essential goods such as food and beverage companies

Sectors and the Economy

Investors use sectors to group stocks and other investments into categories that share unique characteristics. Investment sectors can provide insight as to how an economy is performing and which areas of the economy are performing better than others.

Sectors in an Expanding Economy

If there is a large increase in the purchase of raw materials, such as copper or crude oil, it may be an indication that the economy is expanding. In other words, in an expanding economy, businesses and consumers tend to use more raw materials and energy since consumer and business spending is on the rise.

Industrials would also perform well in an expansionary economy since increased economic growth typically leads to an increase in manufacturing and construction. Similarly, real estate, such as commercial real estate and housing, might also experience an increase in sales and development.

If consumer confidence is high, consumers might increase their purchases of non-essential goods, leading to a rise in consumer discretionary spending. As a result, companies within sectors that benefit from an expanding economy would likely experience increased revenue.

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Sectors in a Slowing Economy

Conversely, if an economy is performing poorly or there are expectations that economic growth will slow in the coming months, companies that sell consumer staples often experience an increase in revenue. The reason for this correlation between a slowing economy and consumer staples stocks is that consumers will likely continue to purchase essential products, such as paper towels and toilet paper, even in periods of negative or slowing growth.

Also, investment sectors may represent a specific risk profile that may or may not attract investors. For example, in a slowing economy, investment in the utilities sector tends to increase since those stocks are considered safe-haven investments.

Understanding economic sectors and the activity driving growth within those sectors can help investors determine which sub-sectors and their stocks will be impacted.

Sector Investing

It is common for investment analysts and other investment professionals to specialize in certain sectors. For example, at large research firms, analysts may cover just one sector, such as technology stocks.

Additionally, investment funds often specialize in a particular economic sector, a practice known as sector investing.

For those who want to invest in a particular sector, there are exchange-traded funds (ETFs) called sector ETFs. These funds contain a basket of stocks or securities within a particular industry or sector. For example, the energy sector, particularly the oil and gas industry, is a large industry that attracts specialized investment funds.

Sector vs. Industry

While a sector represents a large segment of an economy that includes many companies, an industry represents a more narrow focus of the companies within a particular sector. Thus, industries are the result of breaking down a sector into more defined and specific groupings. On the other hand, sectors can represent a large grouping of companies that have similar business activities.

Sectors may have companies that don't necessarily compete with each other, while industries tend to represent corporations that are in direct competition.

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For example, companies within the oil and gas industry, such as Exxon and Chevron, are competitors. Those same companies also fall under the primary sector since they both engage in the extraction of natural resources. However, Exxon or Chevron would not likely compete with companies involved in agriculture despite being classified within the primary sector.

Sectors of the Economy FAQs

What Are the 4 Main Economic Sectors?

The four main sectors of an economy are listed below:

  • Primary sector: Represents companies that are involved in extracting natural resources and agriculture.
  • Secondary sector: Companies involved in manufacturing, construction, and processing producing goods that use the resources obtained from companies within the primary sector.
  • Tertiary sector: Companies that provide services such as entertainment, financial, and retailers.
  • Quaternary sector: Involves knowledge-based activities such as information technology, research, and development, as well as consulting services and education.

What Is the Largest Sector of the Economy?

The tertiary sector is the largest sector in the United States since the service industry represents the largest share of economic activity.

What Is Meant by Sector Rotation?

In the financial markets, there are sub-sectors of the economic sectors that contain groupings of companies engaged in similar business activities such as financial services or technology. Sector rotation is the process of shifting investments from one sector of an economy to another.

Are Sector and Industry the Same?

Although the terms sector and industry are often used interchangeably, there are distinct differences between them. A sector represents a large grouping of companies within an economy that are engaged in similar business activities. On the other hand, an industry represents a more specific grouping of companies within a particular sector.

For example, oil and gas companies are categorized within the primary sector since they extract natural resources. Companies that engage in agriculture also fall within the primary sector. However, oil and gas companies are grouped within their own industry, separated from companies within the agriculture industry.

The Bottom Line

Sectors are used to categorize the economic activity of consumers and businesses into groupings based on the type of business activity. Each sector represents a different stage of economic activity as it relates to how closely tied or not that activity is to the extraction of natural resources.

For example, primary sector companies are directly engaged in activities utilizing natural resources, such as mining and agriculture. On the other end of the spectrum, the tertiary and quaternary sectors, representing the services and knowledge-based economy, are engaged in activity that is not directly tied to the Earth's resources.

Investors also use sectors to group different types of companies to help gauge whether those companies are performing well or not. Sectors are important since they help investors and economists understand the various levels of economic activity within an economy.

FAQs

What are the 4 main economic sectors? ›

The 4 different sectors of the economy are primary sector, secondary sector, tertiary sector and quaternary sector.

What is meant by economic sector? ›

An economic sector is an area in an economy that is defined by a set of specifications. It is dedicated to a distinct grouping of activities and occupations. Economies are divided into sectors in order to establish a structure that can be monitored and analyzed for insight to be gained about their workings.

How many types of economic sectors are there? ›

The three dominant sectors of the Indian economy are the primary sector, the secondary sector, and the tertiary sector.

What are the different types of sectors? ›

Industries and sectors
  • Agriculture; plantations;other rural sectors.
  • Basic Metal Production.
  • Chemical industries.
  • Commerce.
  • Construction.
  • Education.
  • Financial services; professional services.
  • Food; drink; tobacco.

What are the 4 economic sectors give an example for each sector? ›

The main sectors of the economy are: Primary sector – extraction of raw materials – mining, fishing and agriculture. Secondary / manufacturing sector – concerned with producing finished goods, e.g. Construction sector, manufacturing and utilities, e.g. electricity.

What are the four 4 stages of an economy? ›

There are four stages in the economic cycle: expansion (real GDP is increasing), peak (real GDP stops increasing and begins decreasing), contraction or recession (real GDP is decreasing), and trough (real GDP stops decreasing and starts increasing).

What are the four economic sectors quizlet? ›

the four divisions (categories) of an economy: primary, secondary, tertiary, and quaternary.

What are the 5 economic sectors? ›

Sectors of Economy: Primary, Secondary, Tertiary, Quaternary and Quinary.

What is the main important sector of the economy? ›

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.

What are economic sectors called? ›

A sector is an area of the economy in which businesses share the same or related business activity, product, or service. Sectors represent a large grouping of companies with similar business activities, such as the extraction of natural resources and agriculture.

What are the 3 main economic sectors? ›

The 3 main sectors of the economy are primary, secondary and tertiary sectors. Manufacturing comes under the secondary sector, extraction of raw materials industries comes under the primary sector of the economy and the services industry comes in the tertiary sector of the economy.

What is an economic sector example? ›

This includes banking, health services, retail sales, restaurants, education and administration.

What are the first 4 Principles of economics? ›

1. The four principles of economic decisionmaking are: (1) people face tradeoffs; (2) the cost of something is what you give up to get it; (3) rational people think at the margin; and (4) people respond to incentives.

What are the 4 key economic decisions? ›

Economic activity

the key economic decisions are: what to produce, how to produce, and who is to benefit from the goods and services produced. consumers, producers and government are the main economic groups. the interactions between the main economic groups.

What are the three sectors of the economy and how are they related? ›

The three-sector model in economics divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and service industries which exist to facilitate the transport, distribution and sale of goods produced in the secondary sector (tertiary).

What is primary sector and secondary sector? ›

Primary: involves the retrieval and production of raw-material commodities, such as corn, coal, wood or iron. Miners, farmers and fishermen are all workers in the primary sector. Secondary: involves the transformation of raw or intermediate materials into goods, as in steel into cars, or textiles into clothing.

How are the 3 sectors of economy different from each other? ›

Each sector is interdependent on the other so that the economy as a whole functions properly and efficiently. The primary sector is where the materials for the secondary sector are gathered. In the secondary sector, the product is then made into consumable item(s) which is then distributed by the tertiary sector.

What are the 5 sectors of economy? ›

Sectors of Economy: Primary, Secondary, Tertiary, Quaternary and Quinary.

What are the 5 industry sectors? ›

Industry sectors
  • Primary sector of the economy (the raw materials industry)
  • Secondary sector of the economy (manufacturing and construction)
  • Tertiary sector of the economy (the "service industry")
  • Quaternary sector of the economy (information services)
  • Quinary sector of the economy (human services)

What is the largest of the 4 sectors? ›

In India, the largest of the 4 sectors in terms of contribution to the GDP of the nation is the services sector.

What are the 3 main sectors of the economy? ›

The 3 main sectors of the economy are primary, secondary and tertiary sectors. Manufacturing comes under the secondary sector, extraction of raw materials industries comes under the primary sector of the economy and the services industry comes in the tertiary sector of the economy.

What are the 6 sectors? ›

  • Agriculture. Sustaining growth in agriculture is highly important to developing markets, where the sector is a primary source of livelihood. ...
  • Health & Education. ...
  • Manufacturing. ...
  • Retail & consumer goods. ...
  • Financial services. ...
  • Transport & communications.
Jan 26, 2017

What are the 7 sectors? ›

What are sectors in the stock market?
  • Energy.
  • Materials.
  • Industrials.
  • Utilities.
  • Healthcare.
  • Financials.
  • Consumer Discretionary.
  • Consumer Staples.

What is the fourth sector called? ›

For-benefits are a rapidly growing class of organisation that are giving rise to a new, fourth sector of the economy. Like nonprofits and governmental agencies, for-benefits pursue a wide range of social and environmental objectives as their primary purpose.

What is the fourth sector also known as? ›

Endeavors in this sector, also known as for-benefit enterprises, come in a wide variety of models, from mission-driven businesses, social enterprises, and sustainable businesses, to cooperatives, benefit corporations, and faith-based enterprises, among many others.

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