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How industries are classified



In an attempt to organize the vast amount of information about industry, economists have developed various classification systems. Each system groups industries that are similar in some way. One common system is the North American Industry Classification System (NAICS) used by the governments of Canada, Mexico, and the United States. But for certain purposes, other systems are more suitable.

The NAICS classifies businesses into 20 major sectors, each represented by one or more two-digit numbers. The codes and their associated sectors are (11) agriculture, forestry, fishing, and hunting; (21) mining; (22) utilities; (23) construction; (31 to 33) manufacturing; (42) wholesale trade; (44 and 45) retail trade; (48 and 49) transportation and warehousing; (51) information; (52) finance and insurance; (53) real estate and rental and leasing; (54) professional, scientific, and technical services; (55) management of companies and enterprises; (56) administrative support and waste management and remediation services; (61) educational services; (62) health care and social assistance; (71) arts, education, and recreation; (72) accommodation and food services; (81) other services (except public administration), and (92) public administration. Each of the 20 sectors is further divided into industry groups of increasing specialization, represented by three-, four-, five-, and six-digit codes.

Other systems of classification are more useful than the NAICS for some purposes. To study price competition or the effectiveness of advertising, economists may group together products that are close substitutes for one another. For example, tin cans and glass jars serve many of the same purposes. But they fall into different major industry groups under the NAICS because different materials and processes are used to manufacture them. For some studies, economists divide industries into those that manufacture durable goods, such as appliances and furniture, and those that produce nondurable goods, such as clothing and food. During periods of economic decline, durable goods industries suffer more than nondurable goods industries. People can postpone buying new furniture, but they must purchase food and medicine. Industries can also be divided into those that produce consumer goods for sale to individuals and those that make capital goods, also called producer goods, for sale to business firms. Consumer goods include clothing, household articles, toys, and other items for personal use. Capital goods include tractors, machinery, and tools as well as steel and various chemicals used to make other products.

Another method of industrial classification depends on the industry's stage of production. Industries such as agriculture, fishing, and mining belong to the first stage of production, in which natural resources or raw materials are obtained. These industries are called primary industries or extractive industries. The chemical, textile, and other manufacturing industries make up the second stage of production, in which raw materials are turned into finished goods. They are called secondary industries or fabricating industries. The third stage involves the movement of goods from producers to consumers. Industries at this stage of production include automobile dealers, drugstores, and trucking firms. They are known as tertiary industries or distributive industries.

Contributor: William S. Comanor, Ph.D., Professor of Economics, University of California, Santa Barbara; Professor of Health Services, University of California, Los Angeles.
Source : World Book 2005




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