What Is a Developed Economy? Definition, How It Works, HDI Index

What Is a Developed Economy?

A developed economy is typically characteristic of a developed country with a relatively high level of economic growth and security. Standard criteria for evaluating a country's level of development are income per capita or per capita gross domestic product, the level of industrialization, the general standard of living, and the amount of technological infrastructure.

Noneconomic factors, such as the human development index (HDI), which quantifies a country's levels of education, literacy, and health into a single figure, can also be used to evaluate an economy or the degree of development.

Understanding a Developed Economy

The most common metric used to determine if an economy is developed or developing is per capita gross domestic product (GDP), although no strict level exists for an economy to be considered either developing or developed. Some economists consider $12,000 to $15,000 per capita GDP to be sufficient for developed status while others do not consider a country developed unless its per capita GDP is above $25,000 or $30,000. The U.S. per capita GDP in 2019 was $65,111.

For countries that are difficult to categorize, economists turn to other factors to determine development status. Standard-of-living measures, such as the infant mortality rate and life expectancy, are useful although there are no set boundaries for these measures either. However, most developed economies suffer fewer than 10 infant deaths per 1,000 live births, and their citizens live to be 75 or older on average.

A high per capita GDP alone does not confer developed economy status without other factors. For example, the United Nations still considers Qatar, with one of the world's highest per-capita GDP in 2021 at around $62,000, a developing economy because the nation has extreme income inequality, a lack of infrastructure, and limited educational opportunities for non-affluent citizens.

Examples of countries with developed economies include the United States, Canada, and most of western Europe, including the United Kingdom and France.

The Human Development Index

The UN's Human Development Index (HDI) looks at three standards of living criteria—literacy rates, access to education, and access to health care—and quantifies this data into a standardized figure between zero and one. Most developed countries have HDI figures above 0.8.

The United Nations, in its annual HDI rankings, reports that in 2020, Norway had the world's highest HDI at 0.957. The United States ranked 17th at 0.926. The top 10 countries in the HDI index were Norway, Ireland, Switzerland, Hong Kong, Iceland, Germany, Sweden, Australia, Netherlands, and Denmark. Niger had the lowest human development index score at 0.394 out of 189 countries.

Developing Economies

Terms such as "emerging countries," "least-developed countries," and "developing countries" are commonly used to refer to countries that do not enjoy the same level of economic security, industrialization, and growth as developed countries. The term "third-world country" to describe a state is today considered archaic and offensive.

The United Nations Conference on Trade and Development notes that the world's least-developed countries are "deemed highly disadvantaged in their development process—many of them for geographical reasons—and (face) more than other countries the risk of failing to come out of poverty."

It is often claimed by proponents of globalization, that globalization is helping to lift developing economies out of poverty and onto a path of improved standards of living, higher wages, and use of modern technology. These benefits have primarily been witnessed in the Asia-Pacific region. Though globalization has not taken root in all developing economies, it has shown to improve the economies in the ones that it has. That being said, globalization does come with drawbacks as well that need to be assessed when foreign investments flow into a developing economy.