Services are the non-physical, intangible parts of our economy, as opposed to goods, which we can touch or handle. Services, such as banking, education, medical treatment, transportation, haircuts, and consultancy make up the vast majority of the economies of the rich nations and most of the emerging nations’ too. During the twentieth century, manufacturing and agriculture shrank as a share of economic activity. Today, over two thirds of GDP (gross domestic product) and four-fifths of employment in the **OECD (Organization for Economic Co-operation and Development) countries are in the services sector.
** The OECD is a unique forum consisting of 35 democracies with market economies – their aim is to promote economic growth, prosperity and sustainable development.
Sometimes it is difficult to differentiate between a service and a good. For example, in health care the administration of a drug combined with the diagnosis of a physical condition or disease includes both goods – medical and diagnostic devices – and services – the expertise of medical professionals.
Services are intangible by nature, there is no time gap between the provision and consumption of a service, you cannot store them, and their transfer is impossible. Goods are tangible, there is a time gap between their production and consumption, they can be stored, and they can be transported from one place to another.
Services cannot be stored
When services are provided and paid for, there is no transfer of ownership or possession. Services cannot be transported or stored. They only exist while they are being provided and consumed. For example, a haircut is a service, you cannot transport or store a haircut – it only exists while somebody is cutting your hair.
When you pay for a service, you receive something intangible – you do not get anything solid. The buyer of a service gets something he or she needs, but does not own any physical, solid or fixed property.
The usefulness or benefits of a particular service are reflected in the purchaser’s willingness to pay for it. Using skill, ingenuity, experience and resources, providers of services benefit consumers.
According to BusinessDictionary.com, services are:
“Intangible products such as accounting, banking, cleaning, consultancy, education, insurance, expertise, medical treatment, or transportation.”
Most services require supporting goods in order to be useful. The same applies to goods – most of them need supporting services in order to be useful. In a book titled – ‘Service Design and Delivery‘ – Glenn Parry, Linda B. Newnes and Xiaoxi Huang wrote: “They (goods and services) will sit at a point along this spectrum. It may be more appropriate to take a goods-services continuum view point rather than defining goods and services explicitly.” (Image: adapted from Wikpedia)
Goods vs. services
Every economy in the world is made up of a combination of goods and services.
– Goods: are physical, tangible things we produce. We can touch or handle them. They are bought or sold and eventually consumed. Goods can be stored and transported.
If you look around your house you will see dozens of examples of goods, including your cooker, microwave, washing machine, dishwasher, TVs, computers, smartphones, furniture, water taps, etc.
Anything you can touch, which we manufacture, extract from mines (and use to make goods), or produce from farming – and which are made and sold/bought – are goods.
If you open your fridge – which is a good – it is full of goods inside that you bought in the supermarket. Somebody made them in a factory or workshop, fished them in a river, lake or sea, extracted them from a mine (and used to make goods), or produced them in a farm.
– Services: these are activities that other individuals, companies or government departments do for you.
When you book a hotel room, a flight, or a vacation, the booking person or company is providing a service. You cannot touch or handle that booking – the booking is an intangible thing, it is abstract. You cannot store or transport that booking.
The government provides public services to its citizens. Examples include the police force, armed forces, ambulances, paramedics, the fire brigade, health care (in most of the advanced economies), public broadcasting, urban planning, and waste management.
According to Macro Economy Meter: “The world’s average Services % of GDP is equal to 63.3 %. Northern Mariana Islands’s Services % of GDP is 2 times higher than the average Services % of GDP of the world. The countries with the highest Services % of GDP are Northern Mariana Islands, Bermuda, Macao SAR, China, Hong Kong SAR, China, The Bahamas with a(n) Services % of GDP of (95), (94), (94), (93), (91) % respectively.” (Image: adapted from mecometer.com)
The five I’s of services
Economists often refer to the features of services as the 5 I’s, which include:
– Intangibility: you cannot touch or handle them, they are not transported, stocked, manufactured, mined or farmed.
– Inventory (Perishability): they cannot be stored for future use. Once the service is provided and consumed, it irreversibly vanishes.
– Inseparability: the service must be delivered by the provider at the time of consumption. Unlike a good – e.g. the maker of a car does not need to be there when I buy or use it – a service can only be delivered and consumed when the provider is present. I cannot have a haircut if the person who cuts my hair is not present.
– Inconsistency: as in ‘variability’. Each delivery of a particular service is never exactly the same as the previous or future ones. Each one is unique, even if the same customer requests the same service.
The haircut I had today may be similar to the one I had two months ago, but it is not 100% identical.
Goods, especially those that come off a production line, are identical – the first Snickers Bar produced in the factory on Monday morning is identical to the second produced on the same day, which are both identical to all the others produced on Tuesday, Wednesday, etc.
– Involvement: both the consumer and provider of a service participate in its provision. For example, during a haircut there are two participants – the customer and the hairdresser (provider). Unless both are present, the service is not possible.
What are goods and services?
This Worldwide Videos lesson explains the difference between goods and services. Although it is aimed at kids, in my opinion it has the clearest and easiest-to-understand explanation of the two parts of our economy.