Developed Economy: Definition, How It Works, HDI Indicator

What Is a Developed Economy?

A developed economy is characterized by prosperity and resources. 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 Developed Economies

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 per-capita GDP in the United States in 2023 was $82,769.

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. 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 GDPs in 2023 at around $80,196, a developing economy because the nation has extreme income inequality, a lack of infrastructure, and limited educational opportunities for nonaffluent citizens.

Examples of countries with developed economies include the U.S., Canada, and most of Western Europe, including the United Kingdom and France.

Human Development Index

The U.N.’s Human Development Index (HDI) looks at three standard-of-living criteria—literacy rates, access to education, and access to healthcare—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 2023, Iceland had the world’s highest HDI at 0.972. The United States ranked 17th at 0.938. The top 10 countries in the HDI were Iceland, Norway, Switzerland, Denmark, Germany, Sweden, Australia, Hong Kong, the Netherlands, and Belgium. South Sudan had the lowest HDI score, at 0.388 out of 193 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 considered archaic and offensive today.

The United Nations’ Conference on Trade and Development notes that the world’s least developed countries are “deemed highly disadvantaged in their development process, for structural, historical, and also geographical reasons” and “face more than other countries the risk of deeper poverty and remaining in a situation of underdevelopment.”

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 been shown to improve the economies in the ones where 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.