industrial classification

industrial classification

the grouping of economic activities of a similar nature into INDUSTRIES or MARKETS. Such a classification begins by identifying a wide spectrum of related activities (for example, the ‘manufacturing sector’), each group of activities then being subdivided into progressively narrower groups so that the classification can be used with varying amounts of detail for different purposes. In the UK, a Standard Industrial Classification (SIC) codifies and measures groups of economic activity at various levels of aggregation and disaggregation. The Standard Industrial Classification comprises 10 major divisions (for example, Metal Goods/Engineering), 60 classes (for example, Metal Manufacturing), 222 groups (for example, Non-ferrous Metals) and 334 activities (for example, Copper).

Activities, or their equivalent ‘industries’ (see INDUSTRY), are derived on the basis of their supply characteristics, in particular the use of common raw materials and processes of manufacture. Such a classification provides a useful source of information on industry structure and statistical details of employment, output and investment by the industrial sector. For purposes of market analysis, however, SIC data usually needs to be reinterpreted in order to provide more meaningful specifications of markets defined in terms of groups of products that are regarded by buyers as close substitute products. To illustrate, glass jars and metal cans are assigned to different industries by the SIC (Division 2, Activity ‘glass containers’; Division 3, ‘packaging products of metal’, respectively) but would be regarded by a user of packaging materials such as a coffee manufacturer as substitute products.

Industrial classifications are used for macroeconomic planning and COMPETITION POLICY purposes, and to obtain statistical information on output and employment. See STRUCTURE OF INDUSTRY, CROSS ELASTICITY OF DEMAND.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005