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The U.S. Service Sector - International Trade of Services and the Information and Communication Technology (ICT)

Seminararbeit 2005 19 Seiten



A) Introduction

B) The U.S. Service Sector
I. Definition of Service
II. Growth in Services
1. Specialization of Labor
2. Growth of Final Demand
3. Growth of Goods-Producing Industries
III. International Trade of U.S. Services
1. Tradability of Services
2. Forms of International Trade of Services
3. Tradable Services and ICT
4. ICT as a Tradable Good
5. Gains from International Trade in Services
IV. Influences of ICT on the U.S. Service Economy
1. Productivity
2. Outsourcing
3. Broader Markets

C) Conclusion


A) Introduction

Already in 1940 the U.S. became a so called “service economy” meaning that more than half of its work force is employed in producing intangibles. By 1975 two thirds of the work force was part of the tertiary sector.[1] The Tertiary Sector, also known as the Service Sector, has become the number one driving force of the U.S. economy during the last decades. According to recent statistics (2002) it nowadays accounts for 78% of the U.S. non-agricultural employment and 76% of the U.S. private sector Gross Domestic Product (GDP). Additionally, the U.S. is the world’s premier services exporter (17% of worldwide services trade) and importer (14% of worldwide services trade) at the same time.[2] These figures alone necessitate a closer look. However, scientist even predict a continuous increase in the relevance of this industry for the U.S. Economy, expecting that almost 100% of additionally created jobs during the next decade will belong to the Service Sector.[3]

This development is even more impressive considering the fact that the Service Sector was a subject almost not worth mentioning in the eyes of scientists up to the 1940s. Adam Smith stated in the 18th century, that services were “unproductive of any value because they do not fix or realize themselves in any permanent subject or vendible commodity which endures after labor is passed”[4]. Another term used for the Tertiary Sector expresses very well the attitude toward this sector: The Residuum Sector, with the residual being the “unproductive labor”[5]. Up to that point in history the merchandise producing industry, the trade of goods – nationally and internationally – and the market’s mechanisms and their expected development in future were the sole focus of economists.

The questions are which factors have lead to the impressive growth of this industry and what will the future hold for it?

This seminar paper will provide a glance at some of the numerous factors, namely the specialization of labor, growth of final demand and growth of goods-producing industries, and will than focus on the development and significance of the Information and Communication Technology for the U.S. service sector.

However, at the beginning the term “service” will be defined and some of its different understandings explained.

B) The U.S. Service Sector

I. Definition of Service

There are many different definitions of services due to the large number of heterogeneous activities that may be classified as “services”. The dilemma of this situation can be well shown by the following example:

Charles A. Waite cites in “Service Sector: Its Importance and Prospects for the Future”, this definition:

“Any work or activity of immediate economic value to another, such as medical or other professional assistance, or the provision of some facility, such as power, heat, or transportation, usually distinguished from a tangible good or commodity and also from any work involved in the production of a tangible good or commodity.”[6]

He later on refers to this as a rather broad definition of services. Ronald Kent Shelp on the opposite, refers to approaches that exclusively emphasize the intangibility of service products as being too narrow. Indeed, according to today’s understanding of services, it is not possible to manufacture any goods without the use of intermediate services.[7]

An alternative approach is to simplify the problem of defining the entity of services by grouping them according to certain characteristics. Some of these approaches focus on the process of production while others focus on the consumption of services.[8] The latter is done by dividing services into final/consumer and intermediate/producer services. However, all of these concepts offer weaknesses and none of these proved to be the ultimate approach.[9]

Depending on the author’s point of view, the reasons for including or excluding certain activities in/from the service sector are usually quite comprehensible. Hence, different definitions lead to different statistics but the discussion of this fact is not part of this paper.

Regarding the development in defining services it is unlikely that the term “service” will be satisfactorily defined in the near future. As if the scope of service products was not wide enough, the range will still widen from “pure” services to almost pure goods. An increasing proportion of goods embody some soft of intermediate services and most services have to be embodied in order to be tradable.[10]

As there is no satisfactory definition service should be broadly understood in the following as an economic activity that adds value either directly to another economic unit or to a good belonging to another economic unit.[11] This includes for example transportation, communication, finance, insurance and government as well as electric, gas and sanitary services.

II. Growth in Services

There are almost as many explanations for growth of the service sector as there are approaches of defining it. Since the services sector is closely intertwined with the manufacturing sector it is not possible to point out isolated reasons for growth within the service sector but a broader point of view has to be taken. In literature, three major causes for the growth in demand can be commonly found but they do not cover all of the decisive variables.

1. Specialization of Labor

The specialization and division of labor is characteristic for the industrial revolution - but also for the development of the service sector. The division of labor causes higher productivity as well as higher quality of the good or service produced[12]. As the complexity of manufactured goods increases the labor is not only divided between manufacturing companies but also between service companies. More knowledge and information have to be accumulated and subsequently organized requiring new administrative and organizational skills which often only experts may supply. This kind of service which is demanded by manufacturers is also called producer or intermediate services.[13] For Example, specialized service companies restructure the manufacturing company’s computer system in order to improve communication with the members of the supply chain.

Contracting out whole business units is yet another form of specialization of labor. For example a specialized car studio helps to create the design of a new roadster because it has better skilled designers and state of the art computer technology.[14] The externalization itself may lead to an increasing output in the service sector at the cost of the manufacturing sector – at least in statistical means. For example: The costs for a company’s internal business services do not affect the total gross product originating in manufacturing. If the internal business services are outsourced and turn into external business services, the company’s total gross product originating in manufacturing automatically decreases by the value of the external services c.p. At the same time the total gross product originating in services increases by the same value. At the bottom line, manufacturing output has decreased while services output has increased even though the type and amount of work is still the same.[15]

This example also shows very well the problems related to the measurement of the service sector’s output which shall not be discussed in this paper either.

2. Growth of Final Demand

This is probably one of the most controversial aspects relating to the growth of the service sector: As the industrial revolution has lead to the above mentioned specialization of labor, output increased sharply as well as the disposable income. Furthermore, working hours were reduced, the disposable time and demand for leisure services which improve quality of life such as entertainment and travel increased.[16] In contrast to basic consumer goods the demand for some consumer services is highly affected by changes in price – it is “elastic to income”.[17] This means that with growing income the proportion between the money spend for goods and services shifts towards the latter according to “Engel’s Law“.[18]

In order to satisfy this growing demand not only the services had to be supplied but also the financial flexibility in any aspect had to be improved. Automated teller machines and credit cards were introduced. Additionally the demand for financial services such as financial planning and retirement accounts and even insurance for consumers increased.[19]

Moreover, shifts in the demographic structure towards longer life expectancy increase the demand for high quality health and care services.[20]

These are just some examples but all of the above mentioned are part of the service sector’s portfolio and can be traced back to the growth of income and subsequently demand.


[1] Ronald Kent Shelp , Beyond Industrialization. Ascendancy of the Global Service Economy. New York: Praeger Publishers, 1981, p. 13.

[2] Douglas B. Cleveland, Services Exports. U.S. Department of Commerce, 2001, p. 1. URL: [15.06.2005].

[3] Douglas B. Cleveland, Services Exports, p. 2.

[4] John C. Shaw, The Service Focus. Developing Winning Game Plans for Service Companies. Homewood Illinois: Dow Jones-Irwin, 1990.The Service Focus, p.8.

[5] John C. Shaw, The Service Focus, p. 9.

[6] Charles A. Waite, “Service Sector: Its Importance and Prospects for the Future” in: Wray O. Candilis, United States service industries handbook. New York: Praeger Publishers, 1988, p.1.

[7] Ronald Kent Shelp , Beyond Industrialization. Ascendancy of the Global Service Economy, p. 10.

[8] J.I. Gershuny / I.D. Miles, The New Service Economy. The Transformation of Employment in Industrial Societies. London: Frances Pinter, 1983, p.11.

[9] A. Waite. Service Sector: Its Importance and Prospects for the Future, p. 2.

[10] John H. Dunning, Transnational Corporations and the Growth of Services: Some Conceptual and Theoretical Issues. New York: United Nations Publication, 1989, p.5.

[11] Gary Hufbauer / Tony Warren, The Globalization of Services. What Has Happened? What Are the Implications? 1999, p. 2. URL: [11.09.2005].

[12] Günter Buttler / Wolfgang Simon, Wachstum durch Dienstleistungen, in: Institut der deutschen Wirtschaft (Hg.), Beiträge zur Wirtschafts- und Sozialpolitik. Köln: Deutscher Instituts-Verlag GmbH, 1987, p. 16.

[13] Charles A. Waite. Service Sector: Its Importance and Prospects for the Future, p. 9.

[14] Geza Feketektuy, “International Trade in Services”, in: Wray O. Candilis, United States service industries handbook. New York: Praeger Publishers, 1988, p. 60.

[15] Charles A. Waite, Service Sector: Its Importance and Prospects for the Future, p. 3.

[16] Charles A. Waite. Service Sector: Its Importance and Prospects for the Future, p. 14.

[17] John H. Dunning, Transnational Corporations and the Growth of Services, p. 7.

[18] Günter Buttler / Wolfgang Simon. Wachstum durch Dienstleistungen, p. 15.

[19] Charles A. Waite, Service Sector: Its Importance and Prospects for the Future, p. 16.

[20] Anita Wölfl, “The Service Economy in OECD countries. STI Working Paper 2005/3”. Paris: OECD Publications, 2005. URL: [08.09.2005].


ISBN (eBook)
590 KB
Institution / Hochschule
Friedrich-Alexander-Universität Erlangen-Nürnberg – Lehrstuhl für Auslandswissenschaft, Englischsprachige Kulturen
2006 (Februar)
Service Sector International Trade Services Information Communication Technology Introduction Amercian Economy



Titel: The U.S. Service Sector - International Trade of Services and the Information and Communication Technology (ICT)