Which of the following activities constitute the real sector in the economy?
- Farmers harvesting their crops
- Textile mills converting raw cotton into fabrics
- A commercial bank lending money to a trading company
- A corporate body issuing Rupee Denominated Bonds overseas
Select the correct answer using the code given below:
- 1 and 2 only
- 2, 3 and 4 only
- 1, 3 and 4 only
- 1, 2, 3 and 4
Explanation
Activities 1 and 2 are part of the real sector
- The domestic economy can be divided into three larger sectors: nonfinancial corporations, households, and Non-profit institutions serving households (NPISHs) in the real sector.
- Hence, there are three sectors of the domestic economy:
- General government sector
- Real sector
- Financial sector
- Sectorization of the domestic economy from the view of monetary statistics is also important to identify money-issuing and holding sectors. Thus, the financial sector is the economy’s money-issuing sector; the real sector is the economy’s money-holding sector; the general government sector is not a money holder, although it may influence the quantity of money through its operations. The real sector of the economy, as noted, consists of enterprises (nonfinancial corporations), households, and nonprofit institutions serving households. From the point of view of monetary and financial statistics, the households and nonprofit institutions serving households are, in some cases, combined into one subsector named “Other resident sectors”. Farmers harvesting crops and textile mills converting raw cotton into fabrics are both examples of production activities. Therefore, they belong to the real sector.
Activities 3 and 4 are not part of the real sector
- The financial sector consists of corporations principally engaged in financial intermediation or in auxiliary financial activities that contribute to financial intermediation. Financial intermediation may be defined as a productive activity in which an institutional unit incurs liabilities on its own account to acquire financial assets through financial market transactions. A commercial bank lending money to a trading company and a corporate body issuing bonds overseas are financial activities. Hence, they fall outside the real sector.
