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 gross domestic product (GDP) per capita, as well as a very significant degree of industrialization.
- 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.
- They are usually defined as having a high level of gross domestic product (GDP) per capita, as well as a very significant degree of industrialization.
- As of 2016, the IMF categorized 39 nations as advanced economies.
Understanding Advanced Economies
The IMF said its 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.
One of the primary ones is GDP per capita, a tally of all the goods and services produced in a country in one year. It is expressed in U.S. dollars (USD) and calculated by dividing a country's GDP by its population. There is no official GDP per capita threshold. Some economists say $12,000 per person is the minimum for an advanced economy, while others argue that $25,000 is an ideal starting point.
Another metric commonly used is the Human Development Index (HDI), which quantifies a country's levels of education, literacy, and health into a single figure. Other important factors usually taken into consideration include export diversification and how much a country is integrated into the global financial system.
As of 2016, 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.
Advanced Economies vs. Non-Advanced Economies
In an advanced economy, population and economic growth tend to be stable and investment is weighted more toward consumption and quality of life. 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.
According to the IMF: “The regional breakdowns of emerging market and developing economies are Commonwealth of Independent States (CIS), emerging and developing Asia, emerging and developing Europe (sometimes also referred to as “central and eastern Europe”), Latin America and the Caribbean (LAC), Middle East, North Africa, Afghanistan, and Pakistan (MENAP), and sub-Saharan Africa (SSA).”
Advanced economies may adopt policies that can have a profound influence and impact on countries that have 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, other nations got caught in the crossfire. 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 2016, 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, also known as the Group of Seven (G7).
Economic Status Not Set in Stone
In 2010, 34 nations were classified by the IMF as advanced economies. Six years later that number 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.