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World Economies

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World Economies

What are the biggest economies in the world? What are some current challenges affecting the world economy? The world economy is not only important for economists. The growing global interdependence means that an economic crisis in one country can have spillover effects on the rest of the world and that one country’s economy can affect a whole region. In what follows, we will take a look at the world economies, how they work, and how they are related.

Global economy

The global economy is the global economic system that accounts for all human activity.

The global economy is the aggregate economic output, movements, and influence of all countries.

When we talk about the global economy, we generally include all economic activities such as production, consumption, and the exchange of financial values within and between countries.

Why is the global economy important?

Collecting data on a global scale can be time consuming and expensive, so why do economists even bother?

The largest 20 economies in the world account for 90% of global GDP and 80% of international trade.1 The five biggest economies have the potential to impact the global economy. Because of how big these countries are and how interdependent our economies are, any economic, social, or political downturn or disaster in any one of these five countries has the potential to shake the global economy.

World economies ranking: global economic powerhouses

There are many big economies in the world. The rankings of each country's economies are primarily based on their GDP and GDP per capita.

GDP (gross domestic product) is the total value of final goods and services produced in an economy over a given period.

GDP per capita is a measure of an economy’s national output/income per person. It shows the prosperity of a country and roughly indicates the average living standards in that country.

We will look at the top 5 biggest economies in the world and discuss their share and impact on the global economy.

If you want to learn more about GDP and GDP per capita, check out our explanation of the Gross Domestic Product.

The top five biggest world economies by GDP

It’s no surprise that the United States is the largest economy in the world. Its nominal GDP is $20.89 trillion. Per capita, it is at $63,413. The biggest contributor to its GDP comes from the service sector which includes real estate, financial services, and healthcare.2

The second-largest economy is China. Its nominal GDP is $14.72 trillion but adjusted for its large population, its GDP per capita is $10,434. The opening of the Chinese economy has significantly impacted the increase in China’s economic growth and development. It has allowed for a more flexible market and an increased flow of foreign direct investment (FDI).3

Japan is the third-largest economy in the world, with a nominal GDP of $5.06 trillion. The GDP per capita is $40,193. Despite its Lost Decades, Japan’s economy has still grown thanks to its advanced technology and manufacturing industries.4

Germany is the fourth-largest economy. Its nominal GDP is $3.85 trillion and its GDP per capita is $46,208. Germany is Europe’s largest economy. The manufacturing industry has had the largest impact on the country’s economic growth.5

The United Kingdom is the fifth-largest economy in the world. The nominal GDP is $2.76 trillion and adjusted for the size of the population, the GDP per capita is $41,124. Economic growth is primarily driven by the financial sector: investment banks, insurance, and other business services.6

World Economies Percentage share of the global economy StudySmarter OriginalsFigure 1. Percentage share of the global economy, StudySmarter Originals. Created from World Bank

As you can see in Figure 1, these five economies contribute to 55.8% of the global economy. It is clear then that any economic slowdown in these countries will severely affect the rest of the world.

One example of the interconnectedness of the world economies is the 2008 Financial Crisis. The US and UK economies were deeply impacted and this resulted in an economic slowdown in many other countries.

Current world economic issues

Each of the previously mentioned top five countries has its own economic challenges. Despite their own challenges, there are economic, social, and political issues that impact the global economy. We will discuss four of them:

  • Rising inflation
  • Rising geopolitical tensions
  • Climate change
  • Low economic growth

World Economies: Rising inflation

This is a challenge affecting nearly every country. In 2022, the UK and the US have reported the highest inflation rates in nearly 30 years.

There are many factors influencing the rise in inflation. Some are because of the 2020 Covid-19 pandemic and the transition to a greener global economy.

High inflation impacts consumer spending as most goods and services become much more expensive, especially if wages aren’t adjusted for inflation.

High prices will significantly impact the poor and will widen the inequality gap between rich and poor.

For investors, higher inflation erodes their investment returns and for businesses, the costs of production will increase.

To learn more about the impacts of rising inflation, read our Inflation and Deflation explanation.

World Economies: Geopolitical tensions

As we already said the world is connected and countries are dependent on each other. This has increased even more due to globalisation.

In economics, Globalisation is the ever-increasing integration process of the world’s economies into a single market.

Any political tension in one country or between two countries has the possibility of impacting trade relationships around the world. Any restriction of trade is sure to produce shortages and lower economic growth globally.

World Economies: Climate change

The impacts of climate change are predicted to cut the annual economic output by $23 trillion.7 Failing crop yields, the spreading of diseases and rising sea levels are set to impact wealth, investment levels, and global economic growth if policies are not implemented quickly to counteract the problems.

This will disproportionately impact developing countries more than developed countries. They will be exposed to warmer temperatures and have fewer resources available (finance, infrastructure, etc.) to adapt to the changing climate.

World Economies: Low economic growth

This is an increasing concern due to the many factors that impact economic growth. The 2020 Covid-19 pandemic has impacted many economies and economists wonder if there will ever be a full recovery from the pandemic.

To learn more about an economic recovery, check out our Economic Cycle article.

Additionally, other global issues that we discussed, like climate and political tensions will also impact global economic growth.

Structure of the world economies

There are many interesting economies that we will discuss in further articles in detail. Here we will just give you an overview of each country’s economy and what you can expect to learn.

World Economies: Singapore economy

The Singapore economy has changed dramatically over the past 50 years. Singapore was a developing economy filled with unemployment, a low skilled labour force, and unfavourable conditions for investors.

Now the country has a developed free-market economy. It attracts foreign investors and is a competitive economy.

In our article on the Singapore Economy, you will be able to see how Singapore turned its economy into a global powerhouse and a hub for investment.

World Economies: South Korean economy

The South Korean economy is another example of a country that was able to change its economy. South Korea has experienced large amounts of growth in a short period of time.

The South Korean Economy article will discuss this and more.

World Economies: Chinese economy

As previously mentioned, China is the second-largest economy in the world. In the Chinese Economy article, you will learn how China was able to move from a closed economy to an open economy. You will see what has contributed to its large economic growth and output as well as its economic forecast.

World Economies: United Kingdom economy

Despite the fact that the UK is the world’s fifth-largest economy, the country has been under complications due to the Covid-19 pandemic and the 2016 vote to leave the EU which is known as Brexit.

This will all be discussed in three explanations: United Kingdom Economy, Impact of Brexit on the UK Economy, and Impact of Brexit on the EU Economy.

The UK is a very interesting case study and real-life example to remember for your exams!

World Economies: Nordic model

The Nordic Model is the model adopted by the five Nordic countries: Finland, Iceland, Sweden, Finland, and Denmark. In this article, you will learn more about a mixed market economy, how the Nordic model compares to other countries, and the advantages as well as criticism of the model.

World Economies: Cuban economy

The Cuban economy is one with an interesting history. In the Cuban Economy article, you will learn more about the country’s economy, its history, and its predicted future.

World Economies: Indian economy

The Indian economy has grown over the past few years. It is now the sixth-largest economy in the world, yet has a significantly low GDP per capita. The characteristics of the Indian economy and how economic growth was boosted are discussed in the Indian Economy explanation.

World Economies: German economy

As we already mentioned, the German economy is the largest economy in Europe and is the fourth-largest economy in the world. Its highly skilled labour force and comparative advantage in manufacturing have given the German economy a boost. Yet it faces some demographic challenges that could potentially restrict its economic growth in the future. All of this is covered in the German Economy explanation.


World Economies - Key takeaways

  • The global economy is the aggregate economic output, movement, and influence of all countries.
  • The five biggest economies contribute so much to the global economy that any economic, social, or political downturn/disaster in any one of these countries has the potential to shake the global economy.
  • The United States of America is the largest economy in the world.
  • The top 5 biggest economies in the world are the US, China, Japan, Germany, and the UK.
  • Rising inflation, rising geopolitical tensions, climate change, and low economic growth are some of the issues that impact the global economy today.

Sources

1. ‘What is the G20’, G20 Foundation.

2. World Bank, GDP (current US$) United States, 2020.

3. World Bank, GDP (current US$) China, 2020.

4. World Bank, GDP (current US$) Japan, 2020.

5. World Bank, GDP (current US$) Germany, 2020.

6. World Bank, GDP (current US$) United Kingdom, 2020.

7. Christopher Flavelle, ‘Climate Change Could Cut World Economy by $23 Trillion in 2050, Insurance Giant Warns’, The New York Times, 2021.

Frequently Asked Questions about World Economies

The top world economies are the United States, China, Japan, Germany and the United Kingdom. Together, these countries have a 55% share of the world’s output.

Some global issues faced by the top world economies are high inflation, lower economic growth, climate change, and rising geopolitical tensions.

The United States is the largest economy in the world. It accounts for ¼ of the world’s output.

Many world economies are experiencing a slowdown because of the Covid-19 pandemic. It has impacted their healthcare systems, supply chains, unemployment, and inflation rates.

The world economy accounts for every country in the world, but the largest 20 economies account for 80% of the world’s economic activity.

Final World Economies Quiz

Question

What type is the Indian economy?

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Answer

India’s economy is mixed.

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Which sector in India employs most of the population?

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Answer

The agriculture sector.

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Which sector is growing rapidly in India?

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Answer

The IT service sector.

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Where do most of India’s population live?

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Answer

Almost two-thirds of the Indian population lives in villages.

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India is a ____ country.

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Answer

developing

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Which of the following is NOT a characteristic of the Indian economy?

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Answer

Equal wealth distribution

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Which of the following is a characteristic of the Indian economy?

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Answer

Low per-capita income

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Which of the following is a characteristic of the Indian economy?

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Answer

High dependence on the primary sector

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Question

Which country is the major export partner of India?

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Answer

The major export partner of India is the US.

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Which country is the major import partner of India?

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Answer

The major import partner of India is China.

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Which of the following is NOT one of the major imports of India?

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Answer

Pharmaceuticals

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Question

Which of the following is NOT one of the major exports of India?


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Answer

Coal

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What is the projected growth rate of the Indian economy?

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Answer

Indian economy is expected to grow by on an average 6-7%.

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Question

Are citizens of India allowed to choose their profession?

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Answer

As the Indian economy is a mixed economy, everyone holds the right to choose their profession.

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Can the Indian government control the market in India?

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Answer

As India is a mixed economy, the government can regulate the market via economic policies.

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Question

What is the type of economic system in Singapore?    

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Answer

Singapore is a highly developed free market economy.

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What makes Singapore's economy so successful? 

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Answer

Investment in education

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Singapore is the richest country in Asia. 

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Answer

True

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Choose three factors that make Singapore's economy successful. 

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Answer

The abundance of natural resources

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When did Singapore gain its independence?

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1963

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Singapore was a British colony.

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True

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Name some high-tech fields Singapore is engaged in.

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Answer

Wafer fabrication, logistics, biotech, pharmaceuticals, integrated circuit design, aerospace engineering.

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How many international businesses are there in Singapore?

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Answer

37000

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How many multinational companies have headquarters in singapore?

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Answer

7000

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How many multinational companies have headquarters in singapore?

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Answer

7000

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Who are major trading partners of Singapore?

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Answer

China, the US, Malaysia, Indonesia, Japan

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How much does entrepot trade (import, storage export of goods at the port) make up Singapore's exports?

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Answer

one third

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Why does Singapore invest heavily in education?

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Answer

Singapore puts education first before everything else as only education can provide workers with high marginal productivity of labour. 

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What are unfavorable conditions for Singapore after gaining its independence?

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Answer

High unemployment rate

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What is the most recent ranking of South Korea's economy on the global scale?

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Answer

In 2021, South Korea ranked as the tenth largest economy globally and fourth in Asia in regards to its GDP. 

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What was Korea's economy like in 1960?

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In 1960 Korea was one of the poorest countries in the world with a GDP per capita of only US $79.

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What were the key reasons for South Korea's economic poverty before the 1960s?

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The key reasons why South Korea faced poverty prior to the 1960s are wars and Japan's occupation from 1910 until 1945. 

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At what rate did South Korea's economy grow between 1962 and 1989?

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Between 1962 and 1989 South Korea's economy grew by 8% annually. 

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How did South Korea's economy begin its growth in 1962?

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From 1962 South Korea's economy started growing thanks to two key factors. First, the US donation of 3.1 billion dollars, and second, the government support of companies that had the potential to boost the economy and create more jobs. 


The rigid education system also pushed and motivated youngsters to create innovations and technological developments.

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Did South Korea's economy continue to grow in 2020?

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Answer

No, in 2020 South Korea's economy saw a decline of 0.9% this was influenced by the pandemic and trade wars between the US and China.

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What is the definition of 'Economic growth'?

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Economic growth is the increase of the real output over a particular period of time. Economic growth is measured by the increase in a country's Gross domestic product (GDP).

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What does short-run economic growth mean?

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Short-run economic growth is the growth of an economy that was performing below its capacity due to underutilised resources such as unemployed labour, and which has grown as a result of using these resources. This type of economic growth is also referred to as an economic recovery.

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What does long-run economic growth mean?

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Long-run economic growth is an increase in aggregate supply over time. An increase in productive capacity in the economy leads to more goods and services being produced.  

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What are the key characteristics of South Korea's economy?

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Answer

The key characteristics of South Korea's economy are:

  • Rapid utilisation of its resources. 
  • Mixed economic system.
  • Exports.  
  • Heavy reliance on foreign trade.

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Question

What type of economic growth did South Korea have in the 1960s?

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South Korea's economic growth in the 1960s can be referred to as short-run economic growth since unused resources were utilised such as unemployed labour.

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What type of economic growth did South Korea have after the 1960s?

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Following the economic recovery in the 1960s Korea's economy has been increasing its GDP and productive efficiency which is referred to as long-run economic growth.

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Why is the GDP per capita measurement important? 

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Answer

GDP per capita measurement is important because it shows average living standards and economic wellbeing in the country.

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Question

What is forecasted to be the future of South Korea's economy?

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Answer

The International Monetary Funds (IMF) forecasts that Korea's economy will continue to grow steadily along with its foreign trade regarding exports and imports. 

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Question

What are the key differences between South and North Korea's economies?

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Answer

The key differences between South Korea's and North Korea's economies are that South Korea's economy developed very quickly, people have above average living standards in the country and GDP is highly influenced by foreign trade. On the other hand, In North Korea statistics of the economic growth or people's living standards are unpublished or unreliable, but the predictions are that country has very slow or no economic growth, people are still lacking basic needs such as food, safety and electricity and the country's economy rely heavily on help from United Nations as well as a few countries including China. 

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Question

What is the Nordic model?

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Answer

The Nordic model is an economic model that combines both capitalism and socialism.

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What countries have adopted the Nordic model?

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Answer

Sweden, Norway, Iceland, Finland and Denmark

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Question

What was the 'Grand Compromise'?

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Answer

It was a compromise between workers and employers. It centralised the coordination of wage negotiations and workers rights.


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What are some characteristics of the Nordic model?

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Answer

Low levels of corruption

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Question

Define creative destruction.

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Answer

Creative destruction refers to the constant change of the economy that ‘destroys’ inefficient processes to ‘create’ or make way for improved and efficient processes.


Show question

Question

What is one similarity between the Nordic model and the US system?

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Answer

Both systems have similar economic growth rates.

Show question

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