What are 'Advanced Economies'

An advanced economy is a term used by the International Monetary Fund to describe developed countries. While there is no established numerical convention to determine whether an economy is advanced or not, advanced economies have a high level of gross domestic product per capita, as well as a very significant degree of industrialization.

BREAKING DOWN 'Advanced Economies'

Another metric commonly used to identify advanced economies is the Human Development Index, which combines multiple factors to measure a country's status. As of 2010 the IMF classified 34 nations as advanced economies. These include the United States and Canada in North America, most nations in Europe, Japan and the Asian tigers, as well as Australia and New Zealand.

How Advanced Economies Influence the Global Market

Advanced economies may adopt policies that can have a profound influence and impact on countries that have smaller, developing economies. For example, central banks in advanced economies could institute policy rate changes that may support their respective countries while putting others at a disadvantage. If a country with an advanced economy faces an economic downturn, it might take on stance 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 the country’s currency, particularly in relation to foreign 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.

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.

When past financial crises struck the United States, for example, other nations soon faced the fallout as overall economic stability was shaken. Advanced economies may form a foundation for a global economy, but 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.

Growth rates in developing economies might be more pronounced by comparison, particularly if a new industry is introduced that changes the fundamentals of the nation; however, the scale of that growth relative to advanced economies might still be small.

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