Economic Analysis AssignmentThe three sector economy model and their roles in the Indian

economy for the past 5 years.

Joy Chakraborty

MBA-IB, 2011-13

Section B

The three sector economy model divides the economy into the Primary, Secondary and Tertiary sectors. It was developed by Colin Clark and Jean Fourastié. It postulates that as an economy develops, it shifts its focus from Primary or Agrarian activities to Secondary or Manufacturing activities and finally to Tertiary or Service sector. According to Fourastié this is leads to increase in quality of life, social security, higher levels of qualification and avoidance of unemployment, among others. But, before we look into the changes that an economy undergoes over time, let us first examine the three sectors more closely.

PrimarySector

SecondarySector

TertiarySector

This sector involves the conversion of natural resources to primary products.

Most of the produce is used as raw materials for other industries.

Major industries in this sector are agriculture, fishing, forestry and mining.

It is more important in less developed and developing economies.

This sector generally takes the output of the primary sector and manufactures finished goods or where they are suitable for use by other businesses, for export, or sale to domestic consumers.

It can be classified into light and heavy industry.

It is an important part of developed economies as it provides a source of employment and payment to the middle class.

They include automobile production, textile production, energy utilities, engineering, breweries and bottlers, construction, etc.

It consists of the "soft" parts of the economy, i.e. activities where people offer their knowledge and time to improve productivity, performance, potential, and sustainability.

Basic characteristic of this sector is the production of services rather than end products.

The tertiary sector of industry involves the provision of services to other businesses as well as final consumers. For the last 30 years, there has been a substantial shift from the primary and secondary sectors to the tertiary sector in industrialised countries. This shift is called tertiarisation.

As an economy develops it moves from Primary sector to the Secondary Sector. The growth of the secondary sector relies heavily on the productivity and efficiency of the Primary sector as it utilises Primary output as raw materials. Developed nations also have a heavily mechanised Primary sector as most of the population is employed in the workforce of Secondary and Tertiary sector. Finally more and more of the economy’s resources are diverted to the Tertiary sector as there is lack of demand of labour in the Primary and Secondary sectors because of automation.

The distribution of the workforce among the three sectors progresses through different stages as follows, according to Fourastié:

1. Traditional Civilisations

Primary sector: 70% Secondary sector: 20% Tertiary sector: 10%

2. Transition Period

Primary sector: 20% Secondary sector: 50% Tertiary sector: 30%

3. Tertiary Civilisations

Primary sector: 10% Secondary sector: 20% Tertiary sector: 70%

Now let us look over the contributions of the different economic sector in India’s GDP and recognise which phase of development the economy in:

2005 (in %) 2006 (in %) 2007 (in %) 2008 (in %) 2009 (in %)Primary Sector

18.82 18.29 18.26 17.59 17.76

Secondary Sector 28.14 28.85 29.04 28.22 26.97

Tertiary Sector 53.04 52.86 52.70 54.20 55.27

*Value of Percentage contribution to Indian GDP done by Value Added Method. Source: World Bank national accounts

data, and OECD National Accounts data files.

Thus, we can see that India is still in the Transitioning economy phase and is well on the way to becoming a Tertiary economy.