- Economic structure is the balance of output and employment across the three sectors.
- That balance changes as a country develops, a process called structural change.
- The structure also shapes what a country trades on world markets.
Key Idea
- Employment composition shows the share of workers in the primary, secondary and tertiary sectors.
- As development proceeds, activity moves from primary to secondary and then to tertiary.
The three sectors
Definition
Economic structure: the relative size of the primary, secondary and tertiary sectors in a country's output and employment.
Primary sector: activity that extracts natural resources, such as farming, fishing, forestry and mining.
Secondary sector: activity that turns raw materials into manufactured goods, including construction.
Tertiary sector: activity that provides services, such as retail, finance, transport, health and education.
- Primary output has low value added and volatile prices, so relying on it leaves national income unstable.
- Secondary output adds more value through processing, which tends to raise productivity and wages.
- Tertiary output dominates rich economies and includes high-value services such as finance and software.
Example
- Suppose a developing economy has a workforce of 10 million: 6.0m in primary, 2.5m in secondary and 1.5m in tertiary activity.
- With 60% in primary work the economy is at an early stage; as it develops this share falls while the secondary then tertiary shares rise.
Structural change with development
- Developing economies have most workers in the primary sector, often in subsistence agriculture with low productivity.
- As agricultural productivity rises, labour is freed to move into the secondary sector, so industry's share of output and jobs rises.
- In developed economies the tertiary sector dominates as incomes rise and demand shifts towards services.
Example
- A low-income economy may have most of its workforce farming, while a high-income one has most in services.
- Rising productivity in agriculture frees labour to move into industry and then services, raising average output per worker.
Pattern of trade
- Developing economies tend to export primary commodities and import manufactures, exposing them to volatile prices and low value added.
- Emerging economies increasingly export manufactured goods, which raises and diversifies export earnings.
- Developed economies export higher-value manufactures and services, giving more stable earnings.
Note
- Dependence on a few primary exports can worsen a country's terms of trade over time, since commodity prices often fall relative to manufactures.
- Moving up to manufacturing and services raises and stabilises export earnings.
Exam technique
- Define the three sectors before describing structural change.
- Link a country's level of development to both its employment composition and its trade pattern.
- Use the terms of trade to evaluate the risk of relying on primary exports.
Common Mistake
- Do not assume every developing economy is purely primary, since many have growing manufacturing sectors.
- Do not confuse the sector where output is produced with the sector where it is sold.
Self review
- Define the primary, secondary and tertiary sectors.
- How does employment composition change as a country develops?
- What does a developing economy typically export and import?
- Why can reliance on primary exports be risky?
