How Advanced Economies Work

The International Monetary Fund doesn't have a specific numerical convention that it uses to determine whether a country is advanced or not. However, advanced economies are typically well developed and industrialized. They tend to have a complex financial structure that integrates naturally with the global system. In 2020, the IMF officially classified 39 countries as advanced economies (including the US, Canada, most European nations, the Asian Tigers, Japan, Australia, and New Zealand). Interestingly, the list does not include Russia and China, which the institution categorizes as emerging economies.

A significant percentage of those who live in advanced economies enjoy a high standard of living, modern technological facilities, accumulation of industrial capital, and seamlessly integrated institutions within the global economic network. The IMF also formally classified the 39 in its World Economic Outlook database. According to the IMF, such classification is not premised on strict criteria. Instead, the economies evolve. The institution has certain core metrics for determining whether a specific country qualifies for classification as an advanced economy or not.

The IMF uses three primary criteria to arrive at their classification for advanced economy status.

  • The first is Gross Domestic Product per capita (or GDP). In this setup, the IMF typically tallies all the goods and services that a country produces in a year. It then divides this figure by its population.
  • The institution also considers factors like export diversification ( note that a developed country's exports shouldn't consist of just a few commodities).
  • Further, the IMF considers how well the aspiring country has integrated into the global financial system.

Real-World Example of an Advanced Economy

The IMF recently classified Lithuania (in 2015) as one of the world's advanced economies (or developed nations). With this decision, the institution promoted Lithuania to the same status as other Euro-era countries. In the same year, IMF statistics projected Lithuania's real GDP would grow by 2.8%. The IMF data further projected a 3.2% growth in 2016. The figures justified Lithuania's rise to the coveted status of a global economic giant. The IMF noted that Lithuania's 2001 accession to the ranks of the WTO and the EU accession in 2004 were among the most significant factors for this leap in fortunes.

Lithuania's admission into the WTO and EU ranks meant that the county would benefit from the free movement of labor, trade, and capital among the EU member states. Further, Lithuania was the last Baltic state to be hit by the widespread economic recession in 2008 since its GDP growth rate remained positive (despite a subsequent 15% slump in 2009). The global credit crunch badly affected the world's retail and real estate sectors. Yet in the third quarter of 2009, Lithuania's economy performed relatively well, growing by an impressive 6.1%. Although Lithuania's real estate and domestic consumption sectors suffered from the 2008 economic downturn, exporters soon made booming profits.

By the close of 2017, Lithuania held a whopping EUR 2.9 billion worth of offshore enterprises. The country made its largest single investment in the Netherlands (24.1 % of the nation's total direct investment). The country's direct EU member states investment was valued at EUR 2.6 billion- this represented 89% of Lithuania's total investment abroad. The country also performed well in the QECD Better Life Index and measures of well-being; it ranked above average in terms of work-life balance and education skills. Overall, the country performed so well that Lithuania's people won the accolade as the happiest people in all Baltic States.

Significance of Advanced Economies

Notably, the entire world is usually affected when the advanced countries' health goes down; the global market also suffers considerably whenever this happens. This often occurs because the advanced nation's economies are closely interrelated, and many developing economies invest and trade with them. If sustained declines and recessions affect the developed nations' flow of investment, the overall growth of other interdependent nations is usually put at risk.

For example, whenever a financial crisis hits the US, the reverberating effects are carried over to many faraway nations. Undoubtedly, advanced economies constitute a crucial foundation for the global economy; thus, they tend to push predictable trends across the entire global system whenever they stagnate. On the other hand, developing economies tend to produce nominal effects on the larger international market.

As noted, the world's largest economies with the highest GDP (calculated in terms of market rates) include global economic drivers like the US, France, Italy, Germany, the United Kingdom, Canada, and Japan. This cluster of nations is also referred to as the Group of Seven (G7) or major advanced economies.