As you can see from the figure above, businesses take inputs (or resources, or

factors of production — all of these refer to the same thing in our context), do
certain processes with them and add value to them, and transform them into
outputs. As simple as that. Now let’s talk about each of the three steps in the
input-output model in more detail.

• Inputs are the resources that businesses use in order to transform them into
outputs by adding value. In traditional economic theory these
resources/inputs are called factors of production:
[Link] (physical resources) — land, real estate or raw materials, for example,
fish, gold, wood.
[Link] (human resources) — people in business: employees and managers.
[Link] (financial resources) — cash and other forms of financial resources as
well as capital goods, i.e. things/equipment used in production: office chairs,
desks, laptops or assembly line robots.
[Link] — skillset that combines all the factors of production in
order to transform them into products (goods and services).
The second stage in input-output model is adding value. Added value is
extra perks/features that are added to inputs in order to sell them to
customers. If there’s no added value, there’s no business. Why would
someone pay extra for something that did not undergo any
transformations? The two major ways in which businesses add value are
production (manufacturing) of goods and provision of services. Speaking
of production, it can be either capital-intensive or labour-intensive.
Capital-intensive refers to high reliance on machinery in production
process. For example, car manufacturing is usually highly automated and
is manly performed by robots. Labour-intensive refers to high reliance on
human labour. For example, textile industry (manufacturing of clothes) is
usually highly labour-intensive and depends on the manual work of
people.
And finally, the last stage of the input-output model is outputs. Output is a
product, that can either be tangible (good) or intangible (service). Once
again, product is either a good or a service. Very often students say
“product” but mean “good”. Goods are products, but not all products are
goods, because services are also products. Products can also be
categorised based on who they are sold to. If a product is sold by one
business to another, this is a producer good or service. This relationship of
one business to another is called B2B (business-to-business). For example,
if a school buys desks and chairs from a furniture manufacturer, that
would be a producer good. If a product is sold by business to the general
public, this is a consumer good or service. This relationship is called B2C
(business-to-consumer). For example, if your parents go to a shop and buy
a desk and a chair for your bedroom, that would be a consumer good. As
you can see, one and the same thing can be either producer or consumer
good or service, depending on who it is sold to.
• Once we are clear about what business is and how input-output model works,
we’re ready to explore business further and talk about business functions. All
businesses, regardless of their size, location and other characteristics have the
same 4 business functions:
[Link] resource management (HRM) — making sure that the right people
are employed and paid by the business, regularly trained, appraised and
treated in accordance with Health & Safety regulations.
[Link] and accounts — planning for the future costs, revenues and cash flow
and keeping records of the costs, revenues and cash flow in the past, as well as
financial analysis and budgeting.
[Link] — making sure the right product is sold at the right price in the
right place using appropriate promotion methods.
[Link] management — making sure that goods are produced using
relevant methods of production and/or making sure that the most efficient
processes are used to provide services.
As you can see, as time goes by, the importance of primary sector declines,
because there is not much added value there, that sector is simply about
extraction of raw materials… Secondary sector increases first (this increase is
called industrialisation) as manufacturing is growing, and then after a
certain point, usually when it becomes cheaper to manufacture goods in a
different country, secondary sector decreases (the decrease of the secondary
sector is called deindustrialisation). Tertiary sector is gradually increasing
over time, because the more economy develops, the wealthier people
usually become, and the more money they prefer to spend on tertiary sector
activities, i.e. services: better education, travel, opening a bank account — all
of these are services. Also, as time goes by, quaternary activities are
increasing because they are proportional to technological progress and
development of IT.
Another conclusion that you can make based on the knowledge about
relative importance of economic sectors is the type of economy. Economies
where primary sector dominates are called less developed economies. This
usually means that workforce is not very well educated and that quality of
life and income levels are not very high. Economies where secondary sector
dominates are called developing economies. An example could be BRICS:
Brazil, Russia, India, China, South Africa. Labour costs in these countries are
relatively low and these countries are a good destination to outsource
manufacturing of goods. Countries where tertiary and quaternary sector
dominate are referred to as developed economies. Income levels there are
relatively high and people spend money on services. At the same time,
labour costs in these countries are also pretty high and it might be very
expensive to manufacture goods in these economies.
One last thing about economic sectors is how to measure their importance. There are two
ways:
[Link] the number of people who work in this or that sector. For example, let’s say in a
tiny country X there are only 100 people and 75 of them work in tertiary sector
businesses: banks, schools, cinemas, barbershops. It means that the relative importance
of this sector is 75%.
[Link] the proportion or total value of GDP in a given sector. If half of the overall GDP
comes from manufacturing, then the relative importance of secondary sector is 50% and
it is an indicator of a developing economy. Or, if GDP is 1 billion dollars and 600 million is
generated by secondary sector, then its importance is 60%.
• Keep in kind that if the sector is more important in terms of GDP, it is not necessarily the
most important in terms of workforce. Very often tertiary sector generates most value,
while primary sector is the most labour-intensive.
• You might be interested in relative importance of economic sectors in different countries.
Follow this link and learn more about it.