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What You Must Know About Economic Classifications


Economic classifications are tools that we use to understand the economy. They provide a framework for analyzing economic activities, and they help us identify trends and patterns in economic data. Economic classifications are used by businesses, governments, and individuals to make informed decisions about investments, public policy, and personal financial planning.

In this article, we will offer an overview of economic classifications and their purposes, including how they are useful in measuring economic progress and inequality. We will also discuss different systems of economic classifications and their limitations, and examine some of their critiques from scholars and policy makers.

What Are Economic Classifications?

Economic classifications are systems that arrange economic activities into categories based on their characteristics, such as their size, scope, nature, or location. The goal is to facilitate comparisons among economic units, such as countries, industries, households, or individuals, and to identify patterns and trends in economic data.

Different economic classifications serve different purposes, depending on their scope and focus. They can be based on various aspects of economic activities, such as production, consumption, trade, income, or wealth. They can also be based on different levels of aggregation, such as macro-level (national or regional), meso-level (industry or sector), or micro-level (household or individual).

Economic classifications are used for a wide range of applications, such as:

Measuring economic performance: Economic classifications provide a standardized way of measuring the size, growth, and distribution of economic activities, such as GDP, GNI, trade flows, or employment rates. They can be used to compare the economic performance of different countries, regions, or sectors over time, and to identify areas of strengths and weaknesses.

Targeting public policy: Economic classifications can help policy makers identify the areas where interventions are most needed, such as to promote economic growth, reduce poverty, or address inequality. They can also help target specific groups or sectors that are more vulnerable or marginalized, such as women, children, or ethnic minorities.

Making investment decisions: Economic classifications can inform investment decisions by providing information on the characteristics and potential of different industries, regions, or countries. They can assist in identifying investment opportunities, assessing risks, and forecasting future trends.

Understanding social inequality: Economic classifications can be used to analyze the distribution of income, wealth, and resources within and across societies. They can help identify the causes and consequences of inequality, and inform policy interventions to reduce poverty and enhance social mobility.

Types of Economic Classifications

There are various types of economic classifications that serve different purposes and perspectives. Some of them are:

1) National income and product accounts (NIPA)

The national income and product accounts are a system of economic accounts that provide a comprehensive perspective on the economic performance and structure of a country. The NIPA accounts include measures of income, production, consumption, investment, trade, and government spending, among others. They are produced by the Bureau of Economic Analysis in the United States, and by similar agencies in other countries.

The NIPA accounts are widely used for measuring economic growth, productivity, and distribution. They provide a detailed picture of the sources and uses of income and output, and can help identify the drivers of economic activity, such as investments, exports, and consumer spending.

2) Industrial classification systems

Industrial classification systems are systems of categorizing economic activities based on their type of output or products. These systems include the International Standard Industrial Classification (ISIC), the North American Industry Classification System (NAICS), and the Standard Industrial Classification (SIC), among others.

Industrial classification systems are used for analyzing the structure and performance of industries and sectors, and understanding their contribution to the economy. They can help identify the strengths and weaknesses of different industries, and inform policy interventions to promote competitiveness and innovation.

3) Occupation classification systems

Occupation classification systems are systems of categorizing workers based on their job duties, skills, and qualifications. These systems include the International Standard Classification of Occupations (ISCO), the Standard Occupational Classification (SOC), and the National Occupational Classification (NOC), among others.

Occupation classification systems are used for analyzing the labor market and workforce characteristics, such as employment rates, wages, and education levels. They can help identify the skills and qualifications needed for different jobs and industries, and inform policy interventions to promote education and training.

4) Income and wealth distribution classifications

Income and wealth distribution classifications are systems of categorizing individuals or households based on their level of income or wealth. These systems include the Gini coefficient, the Lorenz curve, and the Palma ratio, among others.

Income and wealth distribution classifications are used for analyzing the distributional effects of economic policies, and understanding the level of inequality within and across societies. They can help identify the groups or regions that are most affected by poverty or exclusion, and inform policy interventions to enhance social protection and solidarity.

Limitations and Critiques

Despite their usefulness, economic classifications are not without limitations and critiques. Some of the common critiques are:

Overgeneralization: Economic classifications may oversimplify the complexity and diversity of economic activities, and may fail to capture their context-specific features or variations. For example, an industry may have heterogeneous characteristics that cannot be reduced to a single category, or a job may require multiple skills and qualifications that do not fit into a single occupation classification.

Biases and distortions: Economic classifications may produce biases and distortions that reflect the values, interests, or power relations of those who design and use them. For example, an income classification based on household surveys may underestimate the income of the rich, who tend to underreport their income, or overestimate the income of the poor, who may receive informal or non-monetary income sources that are not captured by the surveys.

Inadequate for policy purposes: Economic classifications may not provide sufficient information or granularity for policy purposes, especially when it comes to designing interventions that target specific groups or sectors. For example, an industrial classification may group together firms that have different growth potentials or technological requirements, or an occupation classification may fail to capture the changing demands and skills of the labor market.

Debates on causality and measurement: Economic classifications may not resolve debates on causality and measurement that are central to economic theories and methods. For example, an income classification may not shed light on the causal mechanisms that produce income inequality, or a productivity classification may not disentangle the effects of technology, education, and institutions on productivity growth.


Economic classifications are essential tools for understanding economic activities and making informed decisions about investments, public policy, and personal financial planning. They provide a standardized way of measuring and comparing economic performance and inequality, and they help us identify patterns and trends in economic data.

However, economic classifications have limitations and critiques that should be recognized and addressed. They may oversimplify the complexity and diversity of economic activities, produce biases and distortions that reflect power relations and interests, and provide inadequate or outdated information for policy purposes.

Overall, economic classifications are useful but imperfect tools, and their application and interpretation require critical thinking and contextual sensitivity. They should be complemented with other sources of information and perspectives, such as qualitative research, stakeholder consultations, and multidisciplinary analysis, to achieve a more comprehensive and nuanced understanding of the economy and its impacts on people’s lives.

Trends in tax rates are influenced by both the needs of the government and the needs of the commercial market. Because taxes are so heavily influenced by the economy, economic classifications are used to determine fiscal policies according to political and economic influences. These classifications are not always clear cut and often have both economic and political influences inherent to trends in state taxation.


Progressive Taxes

The progressive tax is a politically oriented tax policy that attempts to make the income tax fairer by increasing the percentage of earned and unearned income withheld as the total sum of earned and unearned income increase. In the plainest of language, this simply means that the richest members of society pay the highest income taxes and the poorest members of society pay the least income taxes. This type of taxation is in line with the equal protection clause of the 14th amendment of the Constitution because everyone’s tax burden is directly proportionate to their respective income. This type of income tax policy is based on the three economic classifications of socioeconomic groups, the working class, the middle class, and the rich. These three economic classifications are distinguished by a legally mandated tax bracket.

The percentage of income tax withheld from someone’s income depends on the tax bracket to which an individual or a married couple belongs. Corporations are also required to pay state income taxes and are similarly placed on a three tier tax bracket system. The main political reason a state legislature may implement the progressive income tax is that the progressive tax distributes the tax burden such that an economic recession would reduce the political upheaval that usually accompanies recessional periods. The progressive tax is also economically prudent because adequate revenue from the rich can allow the government to intervene in the event of economic emergency.

Regressive Taxes

Regressive taxes are the opposite of the progressive tax. They use the same system of determining class by income tax bracket; however, place the bulk of the tax burden on the middle class and poor. The regressive tax is justified because the rich then have the capital to expand the economy. Vicariously, tax cuts for the rich increased the wealth of all because the rich can generate wealth in the private sector through job creation.

Lower taxes on the rich also stimulate the flow of credit that is vital to establishment of new businesses. Regressive taxes create a promising but less forgiving economic market. Regressive taxes are an example of how the income tax may apply to the doctrine of laissez-faire economics. The regressive tax stems from the political belief that the wealth of nations is produced by the fundamental innovations of investment capital and industrial capital.


Income Tax Elasticity

What is meant by “elasticity” in application to taxation is heavily influenced by the concept of “elasticity” in economics. Elasticity in economics refers to the susceptibility of supply and demand to the market fluctuations of the business cycle. State governments understand that both the budgetary needs of government and the income people generate personally are inherently subject to market influences. This is the primary reason why the budget is argued annually in state capitals across America. Tax policy is based on economic conditions as determined by the economic formula of Income demand of elasticity. States do not enjoy the luxury of deficit spending as the federal government does.

In fact, many states are constitutionally required to maintain a balanced budget. Larger states, like New York, New Jersey, and California can run deficits but they almost always result in political upheaval when taxes are raised and services are cut in the event of economic recession. Income taxes are an elastic tax and as such are adjusted according to progressiveness or regressiveness to politically distribute the tax burden because the reality is that some people can handle more taxes than others. Also, given that income taxes are elastic, states impose sales taxes on other elastic commodities to boost revenue to ensure state government solvency.

Inelasticity of Revenue

Not all taxes are elastic. Some state’s impose sales taxes are tacked onto inelastic commodities like food. The inelasticity of a given commodity expresses the fact that slight changes in the price of a product does not change consumer behavior for better or for worse. Consumption of a inelastic commodity is a relatively stable and rarely susceptible to market pressures. Sometimes inelastic sales taxes are imposed on a commodity like alcohol, tobacco, or sugary beverages for political reasons.

Lawmakers choose to raise taxes on such inelastic commodities in hopes to stifle demand for products potentially harmful to one’s health. The state government maintains the inelasticity of demand of these products by increasing the tax burden on smokers as more and more quit with a greater sales tax burden most. The revenue demand remains inelastic while the actual demand is elastic.

This is a form of social control through market incentives. An example of a direct tax that is inelastic is the state property tax because real estate prices remain relatively stable and demand for real estate is almost equally stable. State governments are almost guaranteed revenue from property taxes.

Countercyclical Fiscal Policies

Countercyclical fiscal policies are tax policies that react to the peaks and valleys that characterize the short-term business cycle. Countercyclical fiscal policies are an interventionists approach to taxation that have clear economic ramification. Cyclical fiscal policies wield the economic influence of the state to achieve the economic and political expediencies of a state. All political philosophies have opinions on when countercyclical fiscal policies are appropriate. Countercyclical fiscal policies assume that the role of the government is to push the state economy into the right direction.

Countercyclical fiscal policies can be as simple as lowering the tax rate during a period of economic economic boom or budgetary surplus or as complex as creating a system of tax exemptions, deductions, and credits on income taxes to influence and incentives certain economic behaviors among different social classes. The most effective countercyclical fiscal policies are accomplished by the federal government because the federal government holds the bulk of the political power in the American system of government. State governments, on the other hand, are well equipped to manage economic problems that concern a state by managing its fiscal policy.

Cyclical Fiscal Policies

Cyclical fiscal policies adopt a non-interventionist approach to the state of the economy. These fiscal policies go with the flow of the market trends. This can either be accomplished by a state government by creating active financial incentives to participate in a certain market behavior or to do nothing at all. Most proponents of cyclical fiscal policies opt to have as little influence over the economy as possible.

The government takes a less active role in changing taxes according to the business cycle. It is far less reactionary than countercyclical fiscal policies. Cyclical fiscal policies are adopted to maintain the economic status quo through non-interventionism in the economy of a state.

Non-Cyclical Fiscal Policies

Theoretically, these are fluctuations of the tax rate that are independent of the short term business cycle. The most striking long term market change is the monetary phenomenon of deflation or inflation. States cannot constitutionally manipulate monetary policy. Sound monetary policy is the primary means of combating currency inflation or deflation. Therefore, states have no control over non-cyclical fiscal policies given conventional economic wisdom. Some economists argue that the federal government no longer has the authority to manage monetary policy as the Federal Reserve is a private bank; therefore, the federal government is not even capable of managing monetary policy.