Author: Jim Riley Last updated: Sunday 23 September, 2012
The UK economy is made up of a wide variety of businesses and organisations whose activities generate the income and wealth of the nation.
In terms of the kind of activities undertaken, there are three main sectors of the economy. They are traditionally described as:
Primary sector – this involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector.
Secondary sector - this involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector.
Tertiary (or service) sector – this involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector
The relative importance and size of each sector is closely measured by economists using a measure of GDP which adds together the value of output produced by each sector in the economy using the concept of value added. Value added is the increase in the value of a product at each stage of the production process.
The UK is an advanced economy where the majority of GDP comes from the service industries such as banking and finance, tourism, retailing, education and health and a vast range of other businesses services.
In 2008 less than half of one per cent of the UK’s GDP came from the agricultural sector. Manufacturing accounted for less than 15 per cent of GDP and construction a further 6 per cent. In contrast, the service industries now contribute nearly three quarters of national income. The table below shows and index which illustrates how the size of each sector has changed in recent years:
We can see from the table above how deep was the recession in manufacturing industry during 2009 – output contracted by more than 10 per cent. And there was also a downturn in service sector businesses.
One way of tracking how the size of each sector has changed over the years is to look at how many people are employed in each sector. The chart below shows this for some of the key industries in the UK.
You can see that there was very strong growth in the banking and finance industries up to the credit crunch in 2008. By contrast, the number of people employed in manufacturing (the secondary sector) has declined steadily over the last 15 years.
Why has the secondary sector become less important to the UK? The main reason is that the UK has lost its competitive advantage in many manufacturing markets. UK manufacturers have faced greater competition from businesses in low labour costs countries like China & India.
Contrast the decline in manufacturing with the rapid growth (pre-recession) of the UK service sector. Many service sectors benefitted from much higher government spending on services like education and health. The UK enjoyed a boom in financial services, particularly the City of London which became perhaps the leading location for global financial services businesses.
Manufacturing and service industries are not separate! For example the health of a car exporting business will have a direct bearing on demand, output, profits and jobs in many service businesses such as transportation, design, marketing and vehicle retailing.
Equally service businesses such as online banking require plenty of physical inputs such as machinery and infrastructure to be successful.