If someone talks to you about developed countries, which countries would come to your mind first? The countries in North America and Europe? All the rich countries? If these two things come to your mind, you are close, but these are not quite the precise definition of what constitutes developed countries. Hmm, are you interested now to find out more? Then keep reading!
Developed Countries Definition
There are several definitions of developed countries. The most common definition is based on per capita income.
Generally, developed countries refer to countries or economies with a high per capita income. They are also referred to as industrialized countries, high-income countries, and advanced economies.
Fig. 1 - High-income economies (in dark blue) in 2019 according to the World Bank. Source: Wikimedia Commons
For the 2023 fiscal year, the World Bank classifies high-income economies as those that have a per capita gross national income (GNI) of $13,205 or more.
An alternative method is to use per capita income but adjust it by purchasing power parity. This method can give a more accurate assessment based on the price levels in different countries. This can be important as the nominal exchange rate doesn't always reflect the true purchasing power of a country's currency.
Sounds interesting, doesn't it? You can learn more about it in our explanation: Purchasing Power Parity.
Still, there are more complex and less strict methods when it comes to categorizing which countries are considered developed countries.
The IMF categorizes economies into advanced and developing economies based on three main criteria: 1) per capita income, 2) export diversification, and 3) integration into the international financial system. Notice that the second criterion excludes the oil-rich countries that have high per capita incomes but produce very few other goods.2
Like many other institutions that produce similar categories, the IMF stresses that this categorization into advanced and developing economies provides a reasonable way to organize countries for the purpose of analysis and is not necessarily based on strict criteria.2
Economic Development and Human Development
But is money all there is to how we measure development or progress? Most people would say no. Indeed, there are a few alternative measures of development that takes some other aspects into account.
The Human Development Index (HDI) is a notable effort in this regard. The HDI has been developed by the United Nations Development Programme (UNDP) as a broader measure of countries' developmental progress. The HDI is calculated as an unweighted average of normalized indices for life expectancy, education, and gross national income (GNI) per capita. Among these three, the index for GNI per capita is constructed using the logarithm form, which means that increases in income have a diminishing impact on the HDI at higher levels of income.3
The HDI helps shed some light on some of the other aspects of development that are important for countries to pursue other than solely increasing output and income. But of course, indicators for life expectancy and educational achievement are highly correlated with GNI per capita in a country.
Developed and Developing Countries
The countries that are not considered developed countries fall in the camp of developing countries. Developing countries is a big group that consists of the vast majority of countries in the world. Many of them are located in Asia, Africa, and Latin America.
Developing countries refer to countries or economies with a per capita income that is lower than that of the developed world.
But, we should keep in mind that there is a great amount of variation in income levels among the countries that are in this camp.
The World Bank divides developing countries into three further categories by per capita gross national incomes (GNI): low-income economies, lower-middle-income economies, and upper-middle-income economies.
For the 2023 fiscal year, low-income economies are those with a GNI per capita of $1085 or less. For example, countries like Afghanistan, North Korea, Ethiopia, and Uganda are in this category.Lower-middle-income economies have a GNI per capita between $1,086 and $4,255. This category includes countries like India, Vietnam, Nigeria, Zimbabwe, Ukraine, El Salvador, and Honduras.Upper-middle-income economies have a GNI per capita between $4,256 and $13,205 and include Argentina, Ecuador, Cuba, Brazil, Russia, China, Thailand, Montenegro, and South Africa, for example.1
Curious to learn more about the differences between developed and developing countries? Check out our explanation: Developing Countries.
Characteristics of Developed Countries
To see the characteristics of developed countries, it is helpful to use the IMF's criteria for categorizing them: 1) per capita income, 2) export diversification, and 3) integration into the international financial system. 2
From this, we can say that developed countries have
1) a high per capita income;
2) a diverse industrial mix, including a large services sector;
3) a developed financial system;
We can also add two other criteria from the Human Development Index for developed countries:
4) people having a longer life expectancy at birth;
5) a well-developed educational system.3
Examples of Developed Countries
Let's look at some examples of developed countries.
In general, the services sector makes up a large part of the economies of developed countries. In 2019, the services sector accounts for 62.35% of Germany's GDP compared to the industrial sector which constitutes 27.01% of its GDP.5 The services sector is an even larger part of the United States' GDP. The services sector makes up 77.31% of its GDP while the industrial sector accounts for 18.16% of its GDP.6
We should note that even though there are many common characteristics that all developed countries share, there are still some important differences between them.
One example of this is the differences in their tax-and-redistribution systems. While developed countries generally have more developed tax systems than countries in the developing world, there is great variation in the tax rates across developed countries. For instance, the tax revenue in France is 45.43% of its GDP in 2020. In comparison, this number is 38.34% in Germany and 25.54% in the US.7 As a result, there are great differences in how much these countries spend on social programs.
List of Developed Countries
There is not a set list of developed countries as different institutions designate them using somewhat different criteria. It's important to stress that the criteria to determine whether a country is considered developed are not always strict. Different institutions compile this kind of list for the purpose of statistical analyses.
With all that forewarning, let's look at the list of advanced economies used by the IMF to get a sense of what these countries are.
| Advanced Economies |
|---|
AndorraAustraliaAustriaBelgiumCanadaCyprusCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceHong Kong SAR | IcelandIrelandIsraelItalyJapanKoreaLatviaLithuaniaLuxembourgMacao SARMaltaNetherlandsNew ZealandNorway | PortugalPuerto RicoSan MarinoSingaporeSlovak RepublicSloveniaSpainSwedenSwitzerlandTaiwan Province of ChinaUnited KingdomUnited States |
Table 1 - IMF's list of advanced economies, as of 20224
Notice that this list includes all countries in the euro area as well as the G7 countries. However, not all member states of the European Union are on this list compiled by the IMF.
Developed Countries - Key takeaways
- Generally, developed countries refer to countries or economies with a high per capita income. They are also referred to as industrialized countries, high-income countries, and advanced economies.
- Developing countries refer to countries or economies with a per capita income that is lower than that of the developed world.
- Characteristics of developed countries include: 1) a high per capita income, 2) a diverse industrial mix, including a large services sector; 3) a developed financial system, 4) people having a longer life expectancy at birth, and 5) a well-developed educational system.
References
- "World Bank Country and Lending Groups." World Bank. https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups
- "World Economic Outlook - Frequently Asked Questions." International Monetary Fund. https://www.imf.org/external/pubs/ft/weo/faq.htm#q4b
- "Human Development Index." United Nations Development Programme. https://hdr.undp.org/data-center/human-development-index#/indicies/HDI
- "World Economic Outlook Database—WEO Groups and Aggregates Information." International Monetary Fund. https://www.imf.org/external/pubs/ft/weo/2022/01/weodata/groups.htm
- "Germany: Distribution of gross domestic product (GDP) across economic sectors from 2011 to 2021." Statista. https://www.statista.com/statistics/375569/germany-gdp-distribution-across-economic-sectors/
- "Distribution of gross domestic product (GDP) across economic sectors in the United States from 2000 to 2019." Statista. https://www.statista.com/statistics/270001/distribution-of-gross-domestic-product-gdp-across-economic-sectors-in-the-us/
- "Tax revenue." OECD Data. https://data.oecd.org/tax/tax-revenue.htm#indicator-chart
- Fig. 1: High-income economies 2019 (https://commons.wikimedia.org/wiki/File:High-income_economies_2019.png) by Danelet (https://commons.wikimedia.org/wiki/User:Danelet) is licensed by CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0/deed.en)
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