What Are Advanced Economies?
The term advanced economy is used by theInternational Monetary Fund (IMF) to describe the most developed countries in the world. While there is no established numerical convention to determine whether aneconomyis advanced or not, they are usually defined as having a high level ofper capita income, a very significant degree ofindustrialization, a varied export base, and a financial sector that's integrated into the global financial system.
Key Takeaways
- An advanced economyis a term used by theInternational Monetary Fund(IMF) to describe the most developed countries in the world.
- There is no established numerical convention to determine whether an economy is advanced or not.
- Advanced economies are usually defined as having a high level ofper capita income, a varied export base, and a financial sector that's integrated into the global financial system.
- As of 2024, the IMF categorized 41 nations as advanced economies.
Understanding Advanced Economies
The term advanced economies is generally used in a casual sense, referring to countries with decent standards of living, a substantial accumulation of industrial capital, modern technologies, and institutions that are firmly embedded within the global economy.
It is also a formal classification used by the IMF for its World Economic Outlook (WEO) database. The IMF classification is “not based on strict criteria” and has “evolved over time.” However, there are core metrics that the organization is believed to regularly use to determine whether an economy should be categorized as advanced.
Advanced Economies Criteria
The IMF uses three main criteria to classify countries as advanced economies.
- Gross domestic product (GDP)per capita, which tallies up all the goods and services produced in a country in one year and divides this number by its population.
- Export diversification. Countries with high GDP are not considered advanced economies if their exports consist mostly of a few commodities.
- Integration into the global financial system. This includes both a country's volume of international trade and its adoption of and participation in international financial institutions.
Countries that have high per capita GDP but whose exports are heavily concentrated in a particular commodity are not categorized as advanced economies by the IMF.
Other factors that people might consider include measures of economic development, financial sophistication, or social welfare. For example, an analyst might look at the UN'sHuman Development Index (HDI), which quantifies a country's levels of education, literacy, and health into a "geometric mean," as a quick way to classify an advanced economy.
As of 2024, the IMF categorized 41 nations as advanced economies. These include the United States and Canada, most nations in Europe, Japan, and the Asian tigers, as well as Australia and New Zealand. Notably, the IMF classification excludes both China and Russia, instead classifying them as emerging economies.
Advanced economies are also sometimes referred to as developed, industrialized, or mature economies.
Special Considerations
When Advanced Economies Sneeze
The health of advanced economies may have a cascading effect on other countries and the global market as a whole. This is due to the interrelated nature of advanced economies with each other and the developing economies that have trade and investment relations with them. If recessions or other sustained declines hamper the flow of investment by an advanced economy, it can put the growth of other countries at risk.
For example, when past financial crises struck the United States, the effects carried over to many other nations. Advanced economies form a foundation for the global economy, so when they stagnate they also tend to push comparable trends across the system. Developing economies, on the other hand, tend to have nominal effects on the international market.
In 2024, the IMF said the seven largest economies in GDP terms based on market exchange rates were the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. These countries are also known as major advanced economies or the Group of Seven (G7).
Economic Status Not Set in Stone
In 2010, 30 nations were classified by the IMF as advanced economies.Fourteen years later that number had moved up to 41, indicating that developing economies can be promoted. The IMF periodically reviews each country, meaning it can also downgrade a nation from advanced economy status when it sees fit.
Advanced Economies vs. Other Economies
In an advanced economy, population and economic growth tend to be stable and investment is weighted more toward consumption and quality of life.
Developing or emerging market economies, on the other hand, tend to spend big on infrastructure and other fixed asset projects to power economic growth. They export a lot of their goods to consumers living in wealthier advanced economies and often register faster GDP growth by starting from a lower base.
Some of the world's developing or emerging economies include Albania, Bangladesh, Bulgaria, Central African Republic, India, Kenya, Kiribati, Papua New Guinea, and Ukraine.
Protectionism
Advanced economies may adopt policies that have a profound influence and impact on smaller, developing economies. For example, if a country with an advanced economy faces an economic downturn, it might implement policy rate changes to protect its own industries and goods over foreign-made products and services. This could include changing interest rates in order to alter the value of its currency.
New terms on trade arrangements might also be introduced to benefit domestic goods. Such actions could be detrimental to developing economies that have few alternatives for trade or limited means to negotiate with larger economies.
Which Countries Have the Most Advanced Economies?
The major economies of the world are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. The economies of these countries have well-diversified industries, stable and modern financial structures, and high per capita income. Together, these economies make up the Group of Seven (G7).
What's the Difference Between an Advanced and Developed Economy?
Advanced and developed are at different stages. Advanced economies are typically characterized by higher per capita income and more stable financial institutions and structures. People living in countries with advanced economies may also have access to more advanced forms of infrastructure and technology. Developing nations, on the other hand, have a lower standard of living. Their economies tend to be more volatile and often provide the rest of the world with natural resources and cheaper goods. Income levels are not necessarily as high as advanced countries on a per capita basis.
Are the BRICS Considered Advanced Economies?
BRICS is an acronym for Brazil, Russia, India, China, and South Africa. These countries are not considered advanced economies. Rather, they are deemed emerging economies. That's because they have seen rapid economic growth, a rising middle class, increased foreign investment and regulations, and growth potential.
The Bottom Line
Countries with a higher standard of living, higher per capita income, and developed infrastructure have economies that are generally considered advanced. Some of the world's most advanced economies include the U.S., the U.K., Japan, and Canada. This is contrasted with emerging or developing economies, which have a lower standard of living but high growth potential. Keep in mind that advanced doesn't necessarily relate to the size of a nation's economy. China, which has one of the world's largest economies is classified as an emerging economy.
