What Are Advanced Economies?
Advanced economy is a term used by the International Monetary Fund (IMF) to describe the most developed countries in the world. While there is no established numerical convention to determine whether an economy is advanced or not, they are usually defined as having a high level of per capita income, a very significant degree of industrialization, a varied export base, and a financial sector that's integrated into the global financial system.
- An advanced economy is a term used by the International Monetary Fund (IMF) to describe the most developed countries in the world.
- There is no established numerical convention to determine whether an economy is advanced or not.
- Advanced economies are usually defined as having a high level of per capita income, a varied export base, and a financial sector that's integrated into the global financial system.
- As of 2020, the IMF categorized 39 nations as advanced economies.
Understanding Advanced Economies
The term "advanced economies" is generally used in a casual sense, referring to countries with decent standards of living, a substantial accumulation of industrial capital, modern technologies, and institutions that are firmly embedded within the global economy.
It is also a formal classification used by the IMF for its World Economic Outlook (WEO) database. The IMF classification is “not based on strict criteria” and has “evolved over time.” However, there are a number of core metrics that the organization is believed to regularly use to determine whether an economy should be categorized as advanced.
Advanced Economies Criteria
The IMF uses three main criteria to classify countries as advanced economies.
- Gross domestic product (GDP) per capita, which tallies up all the goods and services produced in a country in one year and divides this number by its population.
- Export diversification: Countries with high GDP are not considered advanced economies if their exports consist mostly of a few commodities.
- Integration into the global financial system: This includes both a country's volume of international trade and its adoption of and participation in international financial institutions.
Countries that have high per capita GDP but whose exports are heavily concentrated in a particular commodity are not categorized as advanced economies by the IMF.
Other factors that people might consider include measures of economic development, financial sophistication, or social welfare. For example, an analyst might look at the UN's Human Development Index (HDI), which quantifies a country's levels of education, literacy, and health into a single figure, as a quick way to classify an advanced economy.
As of 2020, the IMF categorized 39 nations as advanced economies. These include the United States and Canada, most nations in Europe, Japan, and the Asian tigers, as well as Australia and New Zealand. Notably, the IMF classification excludes both China and Russia, instead classifying them as emerging economies.
Advanced Economies vs. Non-Advanced Economies
Developing or emerging market economies, on the other hand, tend to spend big on infrastructure and other fixed asset projects to power economic growth. They export a lot of their goods to consumers living in wealthier advanced economies and, by virtue of starting from a lower base, often register faster GDP growth.
Advanced economies may adopt policies that have a profound influence and impact on smaller, developing economies. For example, if a country with an advanced economy faces an economic downturn, it might implement policy rate changes to protect its own industries and goods over foreign-made products and services. This could include changing interest rates in order to alter the value of its currency.
New terms on trade arrangements might also be introduced to benefit domestic goods. Such actions could be detrimental to developing economies that have few alternatives for trade or limited means to negotiate with larger economies.
When Advanced Economies Sneeze
The health of advanced economies may have a cascading effect on other countries and the global market as a whole. This is due to the interrelated nature of advanced economies with each other and the developing economies that have trade and investment relations with them. If recessions or other sustained declines hamper the flow of investment by an advanced economy, it can put the growth of other countries at risk.
For example, when past financial crises struck the United States, the effects carried over to many other nations. Advanced economies form a foundation for the global economy, so when they stagnate they also tend to push comparable trends across the system. Developing economies, on the other hand, tend to have nominal effects on the international market.
In 2020, the IMF said the seven largest economies in GDP terms based on market exchange rates were the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. These countries are also known as major advanced economies or the Group of Seven (G7).
Economic Status Not Set in Stone
In 2010, 34 nations were classified by the IMF as advanced economies. Ten years later that number had moved up to 39, indicating that developing economies can be promoted. The IMF periodically reviews each country, meaning it can also downgrade a nation from advanced economy status when it sees fit.