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The Structure of Output


As an economy grows and reaches new stages of development, so the share of national output from each of the main production sectors changes. The standard hypothesis is that the long road to economic maturity brings a switch from manufacturing and construction towards service industries in the tertiary and quaternary sectors.


Partly this is because the income elasticity of demand for services is higher than for primary and manufactured products. As average living standards grow, the pattern of consumer demand tilts away from goods towards services. Increased government spending on services (such as education and health) adds to this process.


Because comparative advantage between countries changes over time, we expect to see nations switching their resources to industries where they can exploit a new advantage. In Britain’s case, it is widely held that financial services is a sector where we hold a significant advantage over other nations.


However the rate at which this structural transformation takes place must vary from country to country. Even within the so-called advanced economies that make up the OECD¸ there are wide differences in the contributions to output from each industry.


Consider the Group of Seven nations (whose data is shown in the table below). Most of these nations derive over two-thirds of their output from services and the relative size of the primary sector (which includes agriculture, forestry, fishing and other extraction industries) has become very small.


But Germany and Japan still retain significantly large industrial bases. The speed of de-industrialisation has been slower in these two countries contrasted with the USA and the UK.


On a global scale, those countries still reliant on primary production as a key contributor to national income remain well down the world league for living standards.



E-mail Steve Margetts