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Developed Economy

Updated on April 9, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Developed Economy?

A developed economy means an economy (country) with a high level of economic activity characterized by high per capita income or per capita gross domestic product (GDP), high level of industrialization, developed infrastructure, technological advancement, and a relatively high rank in human development, health and education.

What Is A Developed Economy

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These economies also offer great opportunities to developing nations to open their market for goods and services supplied by the developing economies. While there are some setbacks, the net effect of developed economies is generally positive.

Key Takeaways

  • A developed economy refers to a country with a high level of economic activity, characterized by a high per capita income or per capita gross domestic product (GDP), a high level of industrialization, developed infrastructure, technological advancements, and a relatively high rank in human development, health, and education.
  • The key characteristics of developed economies are high income, high human development ranking, a dominant service sector, advanced technology, and a well-developed infrastructure.
  • Developed economies have strong legacies and play an essential role in maintaining peace worldwide. 

Developed Economy Explained

A developed economy is any nation that has higher per capita income. Developed economies have strong legacies. These economies are powerful and play an important role in maintaining peace worldwide. They are the role models for many developing economies like China and India. The world benefits immensely from the financial support and technological strength of all such economies.

There is no straightforward formula that can help label an economy as developed or developing. An economy can be called developed only when it ranks high on several parameters, including per capita income, quality of life of the citizens, health, education, and technological advancement. An economy that ranks high in any one of the parameters but falters on others cannot be developed.

Few of these economies are now facing the brunt of competition from less developed economies and are trying to protect themselves by closing or limiting access to their economies. Due to globalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations.read more, anything going wrong in these economies impacts other countries worldwide.

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Characteristics

Here are the features of a developed economy: –

features of a developed economy

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#1 – High Income

They have a high income as measured by per capita income. The definition of high income varies from institution to institution. The World Bank categorizes a per capita income of $12,376 or above as high income. Any country with per capita income above this threshold and a high rank in other factors qualifies to be in the developed countries list.

As per World Bank, 80 countries in the world make it to the high-income countries (GNI per capita) list, topped by Switzerland ($83,580), Norway ($80,790), Iceland ($67,950), and the United States ($62,850).

#2 – High Human Development Rank

Along with being rich, citizens of this economy should also experience a better quality of life which can be gauged by many factors, including but not limited to literacy rates, life expectancy, infant mortality rates, and access to healthcare. As a result, the United Nations (UN) developed and compiled the Human Development Index (HDI). The UN releases the index periodically to assess the change in the quality of life in different countries.

As per the United Nations, Norway and Switzerland rank at the top in HDI with 0.953 and 0.944, respectively. On the other hand, the United States ranks 13th with an HDI of 0.924, followed by the United Kingdom with an HDI of 0.922.

#3 – Service Sector Domination

As the economy achieves developed status, the service sectorService SectorThe service sector or tertiary sector refers to one of the portions forming the three-sector model of the economic sector. The businesses in the service industry produce intangible goods in the form of service as output delivering to other businesses or consumers.read more becomes a bigger part. The manufacturing is left to other developing countries while developed economies focus on innovation and developing futuristic value-added products.

#4 – Technological Advancements

They are much more technologically advanced due to their skilled workforce and the risk-taking built into their culture. Also, embrace newness, so people are deeply involved in discovering advanced technologies in multiple fields.

#5 – High Level of Infrastructure Development

They are big investors in infrastructure development, which leads to even faster economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more. The quality of roads, rail, air, water, and civil infrastructure is superior to that of less developed or underdeveloped countries.

Examples

The United States, United Kingdom, Canada, Norway, Switzerland, Japan, and South Korea are real-world examples. These economies can be termed as developed economies due to their high level of national incomeNational IncomeThe national income formula calculates the value of total items manufactured in-country by its residents and income received by its residents by adding together consumption, government expenditure, investments made within the country and its net exports.read more (gross national income of above $12,376) and high ranking in the human development index (HDI) (above 0.850), enhanced level of infrastructure development, highly developed industrial base, and a better quality of life of its citizens.

Developed Economy

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Advantages

The advantages below help one understand the developed economy definition and concept even better:

  • These economies generally are easier to do business in, which leads to higher job creation.
  • It gives higher freedom of expression to its citizens, which results in the constructive development of the country and its citizens.
  • These economies are more powerful and secure than underdeveloped and developing economies.
  • These economies add value to the quality of life and business by constantly innovating.
  • They have developed technological leadership as most cutting-edge technology is developed in these nations, then adopted by other countries.
  • These economies have a well-trained workforce as they invest heavily in education and skill development.
  • These economies are more efficient in capital and resource allocation than developing economies.
  • It has a low cost of capital.
  • Developed countries generally adopt free trade and free-market principles for faster economic development.
  • It helps other underdeveloped countries to improve their economy and bring their people out of poverty.
  • Developed countries help less developed or developing countries in various humanitarian and developmental causes.
  • As developed economies have a long track record in governance and management, they copy and adapt build models to build their models for faster development.

Disadvantages

There are several different disadvantages: –

Developed Economy Vs Developing Economy

A developed economy is one that already has become a high-income country and that continues to maintain its status despite economic downturns. On the other hand, developing economies include nations that strive to and are in the process of becoming developed countries.

CategoryDeveloped economyDeveloping economy
DefinitionCountry with significant rate of industrialization.Comparatively slower rate of industrialization
IncomeHigher per capita incomeLower per capita income
Living standardsHigh quality of life with low unemployment ratesPeople struggle to maintain a quality life as there comparatively higher unemployment rate
Revenue sourceIndustrial setupsService sector
Factors of productionEffectively usedUtilized not that effectively

Frequently Asked Questions (FAQs)

1. Which is the most developed economy based on per capita income?

Luxembourg is widely considered to have one of the most developed economies in the world. As a result, its citizens enjoy a high standard of living, and the country’s per capita income is among the highest in the world.

2. What are developed economies vs. emerging markets?

Developed economies refer to countries that have achieved a high level of economic development characterized by advanced infrastructure, technology, and a high standard of living. Emerging markets, on the other hand, are countries that are in the process of transitioning from less developed to more developed economies. These countries typically have high growth rates, but their economies are still developing.

3. What are developed economies vs. industrialized nations?

Developed economies and industrialized nations are often used interchangeably to describe countries with advanced industrial and economic systems, advanced infrastructure, and high living standards. However, industrialized nations may refer specifically to countries that have a strong manufacturing base and advanced industrial sectors. At the same time, developed economies may include countries with a more diversified economy, including service-based sectors such as finance and technology.

This article has been a guide to What is a Developed Economy. We explain its characteristics, examples, advantages, disadvantages, and vs developing economy. You can learn more from the following articles: –

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