Advanced Economies

The advanced economies (AEs) are the richer, more industrialized countries of the world. AEs are often referred to as the developed economies or developed countries.

Table 13.2 Advanced Economies by Subgroup, 2012

Source: International Monetary Fund, World Economic Outlook April 2013, 137, 140.

In 2004 the International Monetary Fund (IMF) revised the global classification of countries from three to two categories. Prior to 2004 the three categories of countries included advanced, developing, and transition. The revised IMF categories include AEs, and emerging market and developing economies.

The classification of economies by multilateral organizations such as World Bank and the IMF is not exactly the same. IMF data, for example, identifies just 188 economies compared to 214 economies reported by the World Bank. IMF data excludes countries that are not members of the IMF as well as countries that have limited or unreliable economic data. Both the World Bank and the IMF agree on the number and composition of the world's 35 advanced economies, as shown in Table 13.2.^[1] The IMF reports that these 35 AEs accounted for 15 percent of the world's population in 2012 but produced 50.1 percent of global GDP and 61.2 percent of global trade on a PPP basis.^[2]

The advanced economies benefit from a virtuous cycle that supports and strengthens sustainable economic development. The virtuous cycle is based on the use of national savings for productive investment. The result of this investment is capital deepening— the increase in real capital per worker over time. Capital deepening increases worker productivity along with sustained economic growth and development.

The advanced economies maintain the virtuous cycle by nurturing a progrowth and prodevelopment business climate. Economic factors conducive to economic development include capital formation, which stems from significant saving and investing in capital goods; human capital development, which is derived from education, training, and other investments in the labor force; and innovation, which is supported by research and development (R&D), economic freedom, and entrepreneurial activity. Political factors that favor sustainable development include good governance and significant investment in public infrastructure and social programs.

Most business activity in advanced economies is associated with the production and consumption of services. A lesser amount of output is made by the goods-producing sector. The services-producing sector includes transportation and public utilities, wholesale and retail trade, real estate, banking and other financial services, computer data processing services, government, and others. The goods-producing sector includes basic industries and agriculture. The basic industrial categories are manufacturing, construction, and mining.

Raffles Place, in downtown Singapore, symbolizes successful economic development in the Newly Industrialized Asian Economies. (Amanda Hall/Robert Harding World Imagery/Corbis)

Agriculture consists of farming, dairying, livestock and poultry, forestry, fishing, and shellfish industries. In 2010 over 75 percent of the gross domestic product (GDP) in the highincome countries consisted of services, with lesser amounts in industry and agriculture, as shown in Figure 13.1. National output in the United States, the world's largest advanced economy, was even more skewed in favor of services (79 percent of GDP) over industry (20 percent) and agriculture (1 percent).^[3]

Figure 13.1 Structure of Output: High-Income Economies, 2010

Source: World Bank, World Development Indicators: 2012, 218–220.

Table 13.3 Emerging Market and Developing Economies, 2012^[4]

Source: International Monetary Fund, World Economic Outlook April 2013, 139.

Most people living in the advanced economies enjoy a high standard of living and quality of life. In part, this is a result of a relatively high GNI per capita in the advanced economies. A high GNI per capita expands consumer choice and opportunities to pursue leisure activities. In addition, the wealth of advanced economies enables government to provide essential public goods, including infrastructure and a social safety net to support people's well-being. One internationally recognized measure of quality of life is the Human Development Index (HDI), which is reported annually by the United Nations Development Program (UNDP). The HDI assesses quality of life indicators such as life expectancy, access to education, and GNI per capita. Not surprisingly, the advanced economies consistently dominate the “very high human development” category. Topping the 2012 HDI rankings were Norway, Australia, the United States, the Netherlands, and Germany respectively. The “low human development” category, on the other hand, was dominated by low-income and lower-middle-income countries.^[5]

• [1] International Monetary Fund (IMF), “Table B: Advanced Economies by Subgroup,” World Economic Outlook: April 2013 (Washington, DC: IMF Publication Services, 2013), 137, 140.
• [2] IMF, “Table A: Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population,” World Economic Outlook: April 2013, 139.
• [3] World Bank, “Table 4.2: Structure of Output,” World Development Indicators: 2012, 218–220.
• [4] Some rounding
• [5] United Nations Development Program (UNDP), “Table 1: Human Development Index and Its Components,” Human Development Report, 2013: The Rise of the South; Human Progress in a Diverse World (New York: UNDP, 2013), 144–147.