The correct option is indeed "1 and 2 only" because the real sector of the economy encompasses activities that involve the production of goods and services, thereby contributing directly to the economy's tangible output. Farmers harvesting crops (activity 1) and textile mills converting raw cotton into fabrics (activity 2) are both directly involved in the production of agricultural and manufactured goods, respectively. In contrast, activities such as lending money by a bank (activity 3) and issuing bonds (activity 4) pertain to the financial sector, which facilitates economic transactions but does not directly produce goods or services. This distinction is fundamental in economic studies, reflecting how various sectors contribute to overall economic health and productivity, a central theme in UPSC GS Paper I on economic concepts.