Developed Economy

Refers to all countries or regions with a high level of economic activity, technological advancements, and quality of life.

Author: Sid Arora
Sid Arora
Sid Arora
Investment Banking | Hedge Fund | Private Equity

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:December 10, 2023

What is a Developed Economy?

It refers to all countries or regions with a high level of economic activity, technological advancements, and quality of life. These countries are fully industrialized.

Such economies have large resources and wealth available to their citizens. The real-world examples include Unites States, United Kingdom, Canada, Norway, Switzerland, South Korea, and Japan.

These economies exhibit high levels of economic growth and security. Common indicators of development in these economies are high per capita income or high per capita gross domestic product (GDP), developed infrastructure, and high standards of living.

Alternatively, they have also been termed First world countries, industrialized countries, high-income countries, more economically developed countries (MEDC), and advanced countries.

These economies are considered more set than others in terms of the growth rate of human capital, decrease in inequality and income disparity, and structural changes and infrastructure that improve citizens' quality of life.

Developed countries have an advanced service sector. The share of the service sector in the country’s GDP is more than the industrial sector.

Developing countries have a comparatively less advanced service sector. The industrial sector forms the maximum share of GDP. In undeveloped countries, the agrarian sector is the largest contributor to GDP.

The concept of characterizing countries based on the level of economic activity first emerged during the Cold War. Alfred Sauvy, a French anthropologist, used the term Third World to describe impoverished nations. These nations were politically unstable and economically undeveloped. 

With the popular use of the term, the concept of First World and Second World countries emerged.

However, with the fall of the Soviet Union, the largest second-world country, the terminology became obsolete. Moreover, people objected to the terminology, as Third World countries were classified as inferior. The term is now considered archaic and offensive.

Countries since then have been characterized as developed, developing, or undeveloped. 

Characteristics of a developed economy

Though no economies can be similar as several influencing factors differ, developed countries have certain characteristics in common such as

1. High income

This refers to the per capita income of a country, not the total income. This determines the purchasing power of a resident.

A high level of income and economic growth implies high levels of consumption and production activities in the economy. In other words, residents of such countries enjoy a higher standard of living.

The definition of high-income levels varies. According to the World Bank, countries with Gross National Income (GNI) per capita of over $12,696 are considered high-income countries.

A country with a high-income level and high rank in other factors is considered developed.

2. Quality of life

The citizens of these countries enjoy a better quality of life in terms of quality of education, public services, and medical facilities.

The literacy rate and life expectancy of citizens are high. Due to better access to medical facilities, infant mortality rates and maternal mortality rates are low.

The population growth in such countries is low, as birth and death rates are low.

The majority population can meet their basic requirements of food, clothing, and shelter.

3. Service sector and technological advancements

The service sector has the maximum contribution to the GDP. This is because developed countries focus on innovation and supplement manufacturing activities with technological advancements.

Technological advancements involve building a skilled workforce. Researchers are discovering new and innovative technologies in multiple industries.

Such countries also have higher exports than imports.

4. Infrastructure

The level and quality of public infrastructure, including roads, dams, and railways, are higher in these countries. People have better access to public facilities. This leads to faster economic growth. 

5. Responsive polity

Developed economies have a responsive political system that favors the preferences of their citizens. Such a political system is based on public opinion toward the government.

Most developed countries in the world are democracies as they favor the will of the citizens to improve their welfare.

6. Stability

Another important factor in the development of a country is political stability. This is a relatively new factor initiated by the World Bank.

The economic environment also includes the political economy, as it has the power to disrupt or boost economic activities. A civil war, for example, strains consumption activities in a nation. 

In a politically unstable economy, the government cannot provide its citizens with public facilities. Examples include modern-day Afghanistan.

Developed countries have very few instances of corruption as people highly regard laws.

The effectiveness of a polity is measured on a governance scale of -2.5 to +2.5, where +2.5 is the highest rating a country may have.

How to Measure the Development of an Economy

The development of an economy includes both economic growth and welfare. A country is classified as developed, developing, or undeveloped by evaluating both economic and non-economic factors.

  • Economic factors include all activities that contribute to the level of economic activities.

  • Non-economic factors include parameters of social welfare such as literacy rate, life expectancy, and all other factors related to the well-being of residents. 

These factors are typically interconnected. For example, a higher literacy rate increases the workforce’s productivity, leading to GDP growth.

A country must rank high on several parameters to be classified as developed. 

That is, a country with a high rank in only one parameter cannot be considered as developed.

This is because a very small section of people may be earning a vast majority of the income.

For example, though Qatar has a high level of income (GNI per capita- $62,000), it faces inequality in educational opportunities, an income disparity, and a lack of quality public infrastructure. Thus, it cannot be considered a developed economy.

To evaluate the level of development in an economy, economists have formulated several development indexes and criteria that measure such parameters.

Economic factors

The most commonly used index to measure economic factors are

1. GDP

It is the aggregate value of goods and services in a nation,is considered the single best indicator of economic growth. Developed countries show high rates of growth in GDP.

2. GDP per capita

It measures the value of total economic output relative to the population within the domestic territory. It is obtained by the formula,

GDP per capita = GDP at current market prices/population of a country

It reflects the total change in the well-being of the population.

3. GNI per capita
It refers to the value of total economic output relative to the population regardless whether they are inside the domestic borders of the country or abroad.

GDP = GNI + Net factor income from abroad

4. Income per capita 
It is the amount of income earned per person in a nation. This is directly related to the standard of living enjoyed by the residents of a country.

Based on recent data by the World Bank, the top 10 countries by GDP are:

Top 10 countries by GDP
Rank Country GDP (in trillion)
1 United States $20.89
2 China $14.72
3 Japan $5.06
4 Germany $3.85
5 United Kingdom $2.67
6 India $2.66
7 France $2.63
8 Italy $1.89
9 Canada $1.64
10 South Korea $1.63

Non-economic factors

The two most common indexes for measuring non-economic factors are-

1. The Human Development Index

This index assigns each country a score between 0 and 1 using important measures across 3 main aspects- long and healthy life, education, and standard of living. It includes

A. Health indicators

  • Life expectancy at birth: The number of years a citizen can be expected to live.
  • Maternal mortality rate: The number of female deaths per 100,000 live births caused or aggravated by pregnancy and all related conditions.
  • Infant mortality rate: The number of infant deaths per 1,000 live births in a given year. Low mortality rates and a higher life expectancy in developed countries imply better access to quality healthcare as compared to less developed countries.

B. Literacy indicators

  • Adult literacy rate: The percentage of the population aged 15 and above who can read and write any language with understanding used in their everyday life.
  • Primary school enrolment: Total enrollment in primary education regardless of age, expressed as a percentage of the population of total primary education age.
  • Secondary school enrolment: Total enrollment in secondary education regardless of age, expressed as a percentage of the population of total secondary education age.

The HDI measures the standard of living through GNI per capita.

The 10 highest ranked countries according to the Human Development Index (HDI) are

Top 10 countries by HDI
Rank Country HDI
1 Norway 0.954
2 Switzerland 0.946
3 Ireland 0.942
4 Hong Kong 0.939
5 Germany 0.939
6 Iceland 0.938
7 Australia 0.938
8 Sweden 0.937
9 Singapore 0.935
10 Netherlands 0.933

2. The World Happiness Index

WHI is a report published by the United Nations Sustainable Development Solutions Network. It measures national happiness through a respondent’s rating of their own lives. This report aims to help governments in formulating public policies concerning citizens.

The first World Happiness Report was published on April 1, 2012.

According to the World Happiness Report 2022, the three highest-ranked countries are Finland, Denmark, and Switzerland.

Developed Economy FAQs

Researched and authored by Manya Bhardwaj | LinkedIn

Reviewed and Edited by Parul Gupta | LinkedIn

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