19.1 The Diversity of Countries and Economies across the World
4 min read•june 24, 2024
Economic development and living standards vary widely across countries. GDP and GNI per capita are key measures, but they have limitations. These metrics don't capture income inequality or quality of life factors like health and education.
The World Bank classifies countries into income categories based on GNI per capita. Factors like geography, demographics, industry, and institutions play crucial roles in economic development. International factors such as trade and foreign investment also impact a country's economic growth and living standards.
Economic Development and Standards of Living
Standards of living across countries
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- Gross Domestic Product (GDP) per capita
- Calculates the total value of all goods and services produced within a country's borders in a given year, divided by its population size
- Enables comparisons of economic output and productivity between nations (United States, China)
- per capita
- Measures the total income earned by a country's residents from both domestic and international sources, divided by its population
- Accounts for income earned abroad by citizens and businesses, as well as foreign income earned within the country (remittances, foreign investments)
- Provides insights into the economic well-being of a nation's population (Singapore, Luxembourg)
- Differences between GDP and GNI per capita
- Countries with substantial foreign investments may have higher GNI than GDP per capita (Ireland, Netherlands)
- Nations with many citizens working overseas may have higher GNI than GDP per capita (Philippines, Mexico)
- Limitations of GDP and GNI per capita as measures of standard of living
- Fail to capture income distribution, leading to an incomplete picture of economic inequality within a country (Brazil, South Africa)
- Overlook important quality of life factors such as health, education, and social well-being (United States, Japan)
- Ignore environmental costs and sustainability concerns associated with economic growth (China, India)
Income categories of countries
- World Bank income classifications
- Low-income countries: GNI per capita of $1,035 or less (Afghanistan, Uganda)
- Lower-middle-income countries: GNI per capita between 4,045 (India, Nigeria)
- Upper-middle-income countries: GNI per capita between 12,535 (Brazil, China)
- High-income countries: GNI per capita of $12,536 or more (United States, Germany)
- Other economic indicators used for classification
- Human Development Index (HDI): Measures a country's progress in three dimensions - life expectancy, education, and standard of living (Norway, Australia)
- Multidimensional Poverty Index (): Assesses poverty based on deprivations in health, education, and living standards (Niger, Ethiopia)
- : Quantifies income inequality within a country on a scale from 0 (perfect equality) to 1 (perfect inequality) (Sweden, South Africa)
Factors Affecting Economic Development
Factors in economic development
- Geography
- Determines access to valuable natural resources like oil, minerals, and fertile agricultural land (Saudi Arabia, Chile)
- Influences proximity to major trade routes and key markets, affecting transportation costs and market access (Singapore, Panama)
- Impacts climate and environmental conditions, which can affect agricultural productivity and infrastructure development (Russia, Canada)
- Demographics
- Population growth rate and age structure shape labor force size and dependency ratios (Japan, Nigeria)
- Labor force participation rates and skill levels affect productivity and economic competitiveness (Germany, South Korea)
- Urbanization and migration patterns influence the distribution of economic activity and infrastructure needs (China, United States)
- Industry
- Composition of the economy across primary (agriculture), secondary (manufacturing), and tertiary (services) sectors determines growth potential and vulnerability to shocks (Nigeria, United Kingdom)
- Technological advancement and innovation drive productivity gains and the development of new industries (Silicon Valley, Shenzhen)
- Diversification of the economic base reduces reliance on a single sector and increases resilience to external shocks (United Arab Emirates, Singapore)
- from agriculture to manufacturing and services sectors often accompanies economic development
- Institutions
- Political stability and effective governance create a conducive environment for economic growth and investment (Switzerland, New Zealand)
- Strong rule of law and secure property rights encourage entrepreneurship and innovation (United States, Japan)
- Efficient regulatory environment and ease of doing business facilitate private sector development (Hong Kong, Denmark)
- Quality education and healthcare systems enhance and labor productivity (Finland, South Korea)
- Social safety nets and income redistribution policies promote inclusive growth and reduce inequality (Sweden, Canada)
- , including factors like corruption control and regulatory effectiveness, significantly impacts economic performance
International Economic Factors
- and integration into global markets can boost economic growth through increased competition and access to new technologies
- contributes to capital formation, job creation, and technology transfer in recipient countries
- Comparative advantage in certain industries or sectors can drive export-led growth and specialization
- theory suggests that poorer countries may grow faster than richer ones, potentially leading to a narrowing of income gaps over time
Key Terms to Review (10)
Economic Convergence: Economic convergence refers to the tendency of less developed economies to catch up to the living standards and productivity levels of more developed economies over time. It is the process by which poorer countries or regions experience faster economic growth compared to wealthier ones, reducing disparities in per capita income and standards of living.
Foreign Direct Investment: Foreign direct investment (FDI) refers to the investment made by an entity or individual in one country into business interests located in another country. This can involve establishing new operations, acquiring or merging with an existing company, or expanding the operations of an existing foreign-owned business.
Gini Coefficient: The Gini coefficient is a statistical measure that quantifies the degree of inequality within a society or economy. It is commonly used to assess the distribution of income or wealth among a population, with a value of 0 representing perfect equality and a value of 1 representing complete inequality.
Gross National Income (GNI): Gross National Income (GNI) is a measure of the total economic output of a country, including both domestic production and income earned from overseas sources. It represents the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output, plus net receipts of primary income from abroad.
HDI (Human Development Index): The Human Development Index (HDI) is a composite statistic that measures a country's overall achievement in key dimensions of human development, including a long and healthy life, access to knowledge, and a decent standard of living. It is a widely used indicator for evaluating and comparing the level of human development across different countries and economies.
Human Capital: Human capital refers to the knowledge, skills, and abilities that individuals possess, which contribute to their productivity and economic value. It is a crucial component of economic growth and development, as it represents the collective expertise, experience, and capabilities of a population that can be leveraged for productive purposes.
Institutional Quality: Institutional quality refers to the effectiveness, efficiency, and overall performance of the formal and informal institutions that govern a country's economic, political, and social systems. It is a crucial factor in determining a country's long-term economic growth and development.
MPI: MPI, or Marginal Propensity to Import, is an economic concept that measures the change in a country's imports relative to a change in its income or GDP. It represents the fraction of an additional unit of income that is spent on imported goods and services rather than domestic ones.
Structural Transformation: Structural transformation refers to the fundamental changes that occur in the economic structure of a country or region over time. It involves a shift in the relative importance of different sectors of the economy, typically from a predominance of agriculture to a greater emphasis on industry and services.
Trade Openness: Trade openness refers to the degree to which an economy is integrated with the global marketplace through imports, exports, and foreign investment. It is a measure of how open or closed an economy is to international trade and commerce.