Question

What are the three classifications of economies? Why does a country fall into one category or another? With the aid of the internet, how many countries are in each category?

Answer 1

Economic growth is one of the key components of economic development and economic growth by a sustained growth in per capita income. Per capita income roughly measures the average standard of living and may be quite useful for making the comparison of living of standard between two countries. The per capita income is used to indicate the level of the material of the well-being of the people. The annual rate of growth of per capita is widely accepted as an indicator of economic growth. But the rise in the per capita is possible if the growth rate of national income is higher than the growth rate of the population.

Thus, per capita income is a fairly good proxy for several aspects of development. Based on the per capita income, the classifications of economies can be done with respect to the development gap between the developed and developing countries. The World Bank classifies the economies of the world into three categories:

i. low-income economies,

ii. middle-income economies, and

iii. high-income economies.

Also, the rate of growth of per capita income is a reflection of the average productivity of labor, and labor productivity is facilitated by physical capital formation, technological progress, investment in education, labor training, etc. Thus, the rate of growth of per capita roughly indicates the development taking place in areas of physical capital formation, human development, technology, education, etc. The sustained growth is a proxy for progress taking place in different areas of development.

Again, sustained growth in per capita income is a necessary condition for supporting development activities in the infrastructure, public health, nutrition, and education.

Further, the planner and policy-makers can compare the targeted per capita income growth with the actual per capita income growth of developed countries to determine the number of years necessary to close the per capita income gap between a developed and developing country.

Thus, the per capita income is a good proxy for the social and economic structure of the countries. The per capita income gap gives a rough idea of the variation in the standard of living between low-income economies, middle-income economies, and high-income economies. That is why the World Bank uses it to classify the economies. According to the World Bank, countries with per capita income of only $350 per annum are classified as low-income economies, countries with per capita income close to $20,000 per annum are classified as high-income economies, and countries with per capita income in between are classified as middle-income economies.

As classified by the World Bank, there are a total of 81 high-income countries, 109 middle-income countries (53 lower-middle-income countries, and 56 upper-middle-income countries), and 32 low-income countries in the world.