Learn 100% online from anywhere in the world. Enroll today!

Developed Economy

A country with a high level of wealth and resources available to its residents or citizens

What is a Developed Economy?

A developed economy is a region, typically a country, with a high level of wealth and resources available to its residents or citizens.

 

Developed Economy

 

Summary

  • A developed economy is a region, typically a country, with an abundance of wealth and resources available to its residents or citizens.
  • Developed economies tend to demonstrate better results on measurement indexes, which are ways to measure the economic and non-economic factors of a country.
  • The four aspects to a better-developed economy are a productive economy, a responsive polity, an equitable society, and a capable administration.

 

What Does “Developed” Mean?

The notion that an economy is “developed” is not rigorously defined and is instead based on the consideration of a multitude of factors.

Henceforth, we will use a country as a proxy for an economy.

In fact, the state of development of a country depends on factors that are not related to the economy in the most stringent sense.

Instead, there are many different factors (economic or otherwise) that contribute to and measure how developed an economy is. Some of them are:

  • The production level of a country
  • The consumption level of a country
  • The quantity and quality of natural resources
  • The quantity and quality of public infrastructure
  • The education of the general public
  • The level of income of average citizens
  • The incidence of poverty
  • The birth rate
  • The happiness of employees

 

How to Measure the Development of an Economy

In order to quantify the level of development of an economy, economists have developed indexes that measure the aforementioned factors.

Some of the indexes that are commonly used to measure economic factors:

  • Gross Domestic Product (GDP)
  • GDP per Capita
  • Gross National Income (GNI)
  • Income per capita

Logically, developed economies tend to score higher on the measurements above.

 

As non-economic factors also contribute to the evaluation of a developed economy, researchers use proxies of measurements. Two commonly used indexes are:

  1. The Human Development Index (HDI)
  2. The World Happiness Index

 

The Human Development Index assigns countries with a score between 0 and 1 using measures such as “long and healthy life,” “education,” and “standards of living,” while the World Happiness Index measures wellbeing through surveying the overall “level of happiness.”

Although the measurements are not directly related to economic development, developed economies still tend to score higher. Further, these correlations highlight important relationships between non-economic factors and more productive economies.

That is, bettering a country’s non-economic factors – such as education and health care for citizens – is vital to better economic development.

 

Foundation of a Developed Country

According to analysis from the World Institute for Development Economics Research, there are four aspects of society that build the foundation for a developed country. The four pillars are:

  1. Economy: Enhanced productivity
  2. Polity: Reflective of citizens’ preferences
  3. Society: Equal social rights and opportunities
  4. Administration: Effective in implementation

 

Foundation of a Developed Country

 

Economy

Of course, it is important to achieve a high level of productivity and income in order for an economy to become more developed.

However, research suggests that for developed economies, productivity and income come from the production of goods and services instead of natural resource extractions.

 

Polity

Higher developed economies tend to have governments or polities that are responsive to the preference of its citizens. That is, a government is judged based on performance and reflects the opinions of the people it serves.

Contemporarily, democracy seems to achieve this point somewhat haphazardly, as many of the developed economies in the world are democracies.

 

Society

The aspect of society touches upon the availability of opportunities for citizens of different demographics to achieve personal success. The researchers espouse the view that, for economic development to occur, people must believe that they can succeed.

The intuitive conduit is that when people believe they can succeed, individuals will work and be rewarded for innovation and higher productivity, which leads to economic development.

 

Administration

Administration refers to the capability for a government to implement its policies effectively and efficiently – as opposed to polities, which refers to a government that enacts policies as preferred by its citizens.

The importance of implementation is the perception of citizens regarding what the government is stating. In other words, the people of a country must believe a government in order to act upon governmental policies that encourage economic development.

 

Examples Across Different Countries

As mentioned above, developed countries tend to achieve better measurements on both economic and non-economic proxies.

As an example, three countries with developed economies and three without are listed below. Their respective GDP per capita in 2018 (in US dollars) and HDI scores (in 2019) are also provided.

Canada: The GDP per capita in 2018 was $46,233, and its HDI score in 2019 was 0.922.

The United Kingdom: The GDP per capita in 2018 was $42,944, and its HDI score in 2019 was 0.920.

The United States: The GDP per capita in 2018 was $62,795, and its HDI score in 2019 was 0.920.

China: The GDP per capita in 2018 was $9,771, and its HDI score in 2019 was 0.758.

India: The GDP per capita in 2018 was $2,010, and its HDI score in 2019 was 0.647.

Pakistan: The GDP per capita in 2018 was $1,482, and its HDI score in 2019 was 0.560.

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Economic Indicators
  • Gross National Product (GNP)
  • Emerging Markets
  • Macro Environment

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!