Advanced Economies: Definition, 3 Main Criteria, and Statistics

What Are Advanced Economies?

The term advanced economy is used by the International Monetary Fund (IMF) to describe the most developed countries in the world. While there is no established numerical convention to determine whether an economy is advanced or not, they are usually defined as having a high level of per capita income, a very significant degree of industrialization, a varied export base, and a financial sector that's integrated into the global financial system.

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.

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's Human 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.

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.

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.

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.