Which of the following activities constitute real sector in the economy?

UPSC Prelims 2022 Question:

Which of the following activities constitute real sector in the economy?

1. Farmers harvesting their crops
2. Textile mills converting raw cotton into fabrics
3. A commercial bank lending money to a trading company
4. A corporate body issuing Rupee Denominated Bonds overseas

Select the correct answer using the code given below:

a) 1 and 2 only

b) 2, 3 and 4 only

c) 1, 3 and 4 only

d) 1,2, 3 and 4

Correct Answer: Option a) 1 and 2 only

Explanation:

Learn more about the Real Sector of an Economy in the given explanation below.

Real Sector of an Economy

• The real sector of an economy is the key section as activities of this sector persuade economic output and is represented by those economic segments that are essential for the progress of GDP of the economy. So, in this sense, farmers harvesting their crops and textile mills converting raw cotton into fabrics are included under real sector of an economy. So, points 1 and 2 are correct. 
• The real sector of the economy 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”.
• A commercial bank lending money to a trading company and a corporate body issuing Rupee denominated Bonds overseas does not constitute the real sector. So, points 3 and 4 are not correct.

Real Sector vs Financial Sector of an Economy

• The real sector of an economy is essential for economic growth. It includes all activities that directly produce goods and services, such as agriculture, manufacturing, and construction. Households and nonprofit institutions that serve households are also part of the real sector.
• The financial sector, on the other hand, is concerned with the flow of money and other financial assets. It includes activities such as lending, investing, and trading securities. While the financial sector is important for supporting economic growth, it does not directly produce goods or services.
• Economists and policymakers distinguish between the real sector and the financial sector to better understand the drivers of economic growth and to design policies that support the real sector. This distinction helps to ensure that resources are allocated efficiently towards sectors that directly contribute to the production of goods and services, job creation, and overall economic development.

Therefore, option (a) is the correct answer.

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