Updated July 6, 2023
What is a Developed Economy?
A developed economy is a nation with high living standards due to increased productivity, per capita income, and GDP per capita. For example, the US has a GDP per capita of $69,287.5 as of 2021. The UN classifies the United States as a developed economy. According to the UN, the US growth rate stands at an estimation of 3.5% in 2022.
Developed economies are highly technologically developed and industrialized, with excellent infrastructure. Among various methods of measuring the economy, one is if GDP per capita is greater than $12,000. All regulatory bodies operate differently. For example, the World Bank uses gross national income before categorizing a country as a high-income, upper-middle-income, lower-middle-income, or low-income economy.
Key Highlights
- A Developed economy is rich in natural resources and human capital that contributes to diversified industrialization and high per capita income
- However, they face growing inequality, climate change, and environmental degradation
- The primary characteristics are high income, a blooming service industry, improved technology, etc
- We can measure it using HDI, GDP, interest rates, growth rate, unemployment rate, stable birth and death rate, etc.
How does a Developed Economy work?
Developed economies have a high degree of specialization in producing goods and services. They also have high consumption levels. In addition, most of the population works in non-agricultural pursuits, like the service industries (banking or telecommunications).
The economic systems are market-based, where individuals make decisions based on self-interest. It divides the economy into various sectors and measures the progress of each industry.
Additionally, the economy is dynamic, changing continuously through innovations, technological advancements, capital accumulation, social processes, laws, trade agreements, etc.
Characteristics
High-Income:
- A developed economy displays a high income and ranking in all essential factors
- Each institution has a different definition of a high income. For instance, the World Bank defines an income of $12,376 or more as a high income
- For Example, Luxembourg stands first with a GDP of $118,359.5, and the United States is in tenth place with a $63,543.6 GDP.
Human Development:
- Besides being financially affluent, the citizens of this economy also experience a better quality of life
- They enjoy high literacy, life expectancy, and access to excellent healthcare
The Dominance of the Service Industry:
- The service sector starts taking up more economic priority as it moves toward a developed state
- They can concentrate on innovation and creating value-added goods.
State-of-the-art Technology:
- The developed nations maintain a highly skilled workforce and thrive on taking risks to stay technologically advanced
- They enjoy innovation and employ cutting-edge technologies in all fields.
Significant Infrastructure Improvement:
- The developed nations make significant investments in infrastructure expansion, promoting even quicker economic growth
- These nations construct Roads, rail, air, water, and civil infrastructure precisely and within the time frame.
Examples
Example #1: Norway
The Scandinavian country Norway stands among the top developed nations. It is the 171st most densely populated country, with 5,449,650 inhabitants. Its growth rate is around 0.58%. Its significant city Oslo has most of the trade, banking, and shipping.
Example #2: UK
The UK currently has a population of 67,600,196 over 242,900 square kilometers. Its GDP as of Dec 2021 was $3186.86 Billion, and its GDP per Capita is $46209.11. It secures its GDP mainly through transport and services, like public administration, mining, manufacturing, construction, and agriculture.
Example #3: Japan
Japan’s population has declined since 2009, from 128.56 million to 123,701,308 in 2022. It shrunk its pool of taxable citizens, which skyrocketed the social welfare costs. As a result, it became one of the most indebted industrial nations, with public debt twice the economy. Its current growth rate is -53%. However, it is still a developed country.
Measuring Growth
Many factors determine the success of an economy. As GDP measures economic growth by summing the goods/services of a country, it doesn’t consider pollution or inequality.
The US ranks number one in world poverty, with 20% of its population living below the poverty line. In contrast, only 7% of Japanese citizens live below that threshold. However, Japan has more older adults who cannot find work, so they need public assistance from the government.
Therefore, the metric should also capture the value of unpaid work like child care, volunteering, etc. That’s why it’s essential to consider other measurements, such as growth rate, GDP per capita, unemployment rate, inflation, stock market indicators, and interest rates.
Top 10 Developed Countries
These are the top ten countries displaying the maximum Human Development Index (HDI), increasing population, and a sound Gross Domestic Product (GDP).
The table is sequenced as per the HDI.
|
Country |
Human Development Index (HDI) | Population |
Gross Domestic Product (GDP) In Billions |
| Norway |
0.957 |
5,434,319 |
362.20 |
| Switzerland |
0.955 |
8,740,472 |
751.74 |
| Ireland |
0.955 |
5,023,109 |
425.55 |
| Hong Kong |
0.949 |
7,488,865 |
344.88 |
| Iceland |
0.949 |
372,899 |
21.63 |
| Germany |
0.947 |
83,369,843 |
3840 |
| Sweden |
0.945 |
10,549,347 |
541.49 |
| Australia |
0.944 |
26,177,413 |
1360 |
| Netherlands |
0.944 |
17,564,014 |
913.13 |
| Denmark |
0.94 |
5,882,261 |
356.08 |
Advantages
- A developed economy makes it simpler to conduct business and create jobs
- It is more robust and stable as it embraces free trade, adapts innovation, and improves business and quality of life
- They are technological leaders because of cutting-edge technology
- These economies are more effective at allocating capital and resources, and their cost of capital is low
- They support various humanitarian and development causes, which leads to growth for individuals and the nation.
Final Thoughts
One must consider metrics other than GDP to get a clear picture of an economy—wealth distribution, ecological footprint, and economic security. Generally, a developed economy is a system where the people control capital, management, and technology.
Frequently Asked Questions (FAQ)
Q1. What economy does a developed country have?
Answer: A sophisticated economy is the base of a developed country. The country usually maintains a mature economy. These countries are rich and diverse in various industrial and service sectors. They also have high economic growth besides financial security.
Q2. What denotes an underdeveloped economy?
Answer: An underdeveloped economy showcases a low standard of living and per capita income. It faces high unemployment, basic infrastructure, excessive population growth, lack of capital, and a low literacy rate.
Q3. What are the features of a developed economy?
Answer: A developed economy’s prominent features are its high economic growth. It displays a free market with advanced Industrialization and foreign trade. It also has a proper and stable political system. The citizens enjoy good standardized education and health facilities. Additionally, the human development indexes are high with social equity, low levels of poverty, and gender equality.
Q4. What are the limitations of the developed economy?
Answer: Few of the developed economies have significant budget deficits that could eventually cause their economies to collapse. The free market enables them to build economic excesses leading to crises. These economies showcase Income inequality that leads to distrust and a poor standard of living in the lower pyramid of society.
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