Saturday, March 04, 2017

Classification of Economies according to their Financial Standing

This article has been written by Sachin Vashishth for PADMAD.ORG

There are basically two types of economies in the world, developing and developed economies.

The Indian economy is the sixth largest economy in the world despite India being a developing country.

Before we got our independence in 1947, our country was plagued with poverty and our economy was at a standstill.

After independence, the leaders of our country devised numerous strategies to repair the broken economic stature.

These strategies gradually gave way to a rapid increase in the country's economic activity.

As a result of the impeccable economic planning, the national income increased at a steady pace.

At present, the biggest problem that our country faces as a developing economy are problems related with economic growth.

India - A developing Economy

The difference between a developed country and an underdeveloped country is very vague and unclear even today.

According to a group of experts of the United Nations Organization, there are various different problems faced when it comes to understand and defining the term 'underdeveloped country'.

This is justified to a certain extent as there are countless parameters which are to be considered like the per capita income, gross national income, gross domestic product etc. These terms will become clear later on.

Generally, the term "underdeveloped country" is used to refer to those countries whose per capita income is lower than the United States of America, Canada, Australia and  Western Europe. The problem with this interpretation is that calling these countries underdeveloped is the same as calling them "poor countries".

United Nations Classifications

According to some experts at the United Nations, the term "underdeveloped countries" is not an absolute measure of a country's economic state.

It is a relative term. generally, the nations whose per capita income is less than one-fourth of the per capita income of the United States of America, are called as underdeveloped countries.

The term per capita income means the total income of the nation divided by the total population of that nation. 

The United Nations recently decided to call such countries as developing economies instead of underdeveloped countries.

Similarly, the so called developed countries are now called developed economies.

This step was taken to represent that although such countries are still underdeveloped, but the process of development is underway and has been started in these nations. Some examples of developing economies are India, Afghanistan, Indonesia, Iraq and Bangladesh.

According to the World Development Report of the World Bank, the economies of the various countries of the world are classified on the basis of the Gross National Income or GNI of the respective countries.

Gross National Income is defined as the total income received by the residents of a nation plus any incomes from overseas.

This includes all the income by the residents of a country and the product taxes like value added tax.

Income from overseas means the income of the people who are doing business in foreign countries and gain profit from there.

That income is also included in the home country of the merchant. Profits earned by exporting of goods is also under national income but the subsidies provided by the government are not included.

Developing countries are divided into three groups, the high income countries, middle income countries, and the low income countries.

Low Income countries : Those countries whose gross national income per capita is less than  $1025 come into this category.

Middle Income Countries :    Those countries whose gross national income per capita is between $1026 and $12475 come into this category.

High Income Countries : Those countries whose gross national income per capita is more that $12476 come into this category. These countries are most probably the members of the OECD which stands for Organisation for Economic Co-operation and Development.

The Middle Income Countries are further divided into two categories.

Lower Middle Income countries :  Those countries whose gross national income is between $1026 and $4035 come into this category.

Upper Middle Income Countries : Those countries whose gross national income per capita is between $4036 and $12475 come into this category.

Below is a sample of the data of world population and world gross national income for the year 2006.
GroupPopulationGross National Income (Exchange Rate Basis)Gross National Income(PPP Basis)Per Capita Gross National Income
1. Low Income36.93.29.72,698
2. Middle Income47.319.436.77,976
(a) LMI34.99.523.67,020
3. High Income15.877.453.634,701

From the above table, we can make the following observations.

In 2006, 36.9 percent of the world's population belongs to countries that fall into the low income group but these countries are only responsible for 2.7 percent of the world's total gross national income.

The middle income countries comprise of 47 percent of the world's total population and are responsible for 19.4 percent of the total gross national income.

These two groups can be collectively called as the developing economies of the world and they contain about 84 percent of the world's total population and contribute 23 percent to the total gross national income of the world.

As compared to the developing economies, the developed economies consist 16 percent of world's total population and account for 77 percent of the total world gross national income. 

From these figure, we can infer that a huge amount of the poor people live in the lower and middle income countries whereas the rich people live in high income countries.

Sir A.K. Cairncross, a British economist, who died in 1998, truly said, " the developing countries constitute the slum of the world economy".

Talking about India, with a population of 1.1 billion people in 2006, and a per capita income of 820 dollars, has one of the poorest economies in the world. Our country comprises of a whooping 17 percent of the world's total population while only being responsible for 1.9 percent of the total gross national income of the world on an exchange rate basis.

Exchange rate : This is the rate at which one currency is converted into another for trade purposes.

Purchasing Power Parity : This is based on the law of one price. In cases where transaction costs and trade barriers are not available, similar items are considered to be of the same cost. In other words, if there is no way that two currencies can be measured against each other, than two similar items will have the same value and price in different markets if the prices are measured in same currency.

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