Characteristics of developed, developing and emerging economies
This section is A Level content and opens Unit 4, Global business, the paper sat as WBS14/01.
It assumes the AS knowledge from Units 1 and 2 (markets, demand, the marketing mix, exchange rates and the economy) and the A Level work in Unit 3 on strategy, growth and external influences, all of which the Unit 4 paper is allowed to draw on.
The first topic, growing economies, starts with the three kinds of economy every later topic in this unit refers to.
The idea: not every market is the same kind of market
Vesterhaug Toys makes wooden and electronic toys in Halvenmark, a rich country where sales have barely grown for five years.
Its board is choosing between two places to sell next.
Sorvana has 38.6 million people, an economy growing by about 6% a year and a fast-growing class of city families with money to spend for the first time.
Taruma has 52.3 million people, but most of them farm small plots, average incomes are low and many children leave school early.
Both are "foreign markets", but they are very different kinds of economy, and the difference changes everything about the decision: how many families can afford a toy, how prices should be set, what the risks are and how fast the market will grow.
That is why Unit 4 starts with the characteristics of developed, developing and emerging economies.
A global business has to recognise which kind of economy it is dealing with before it can judge whether to sell, produce or invest there.
Developed economies
A developed economy is one with high average incomes and a high standard of living that has already been through industrialisation.
The United States, Germany, Japan and the United Kingdom are examples.
Their typical characteristics:
- High income per head. GDP per capita is high, so most households have spending power well beyond the essentials (the next section but two covers the measures).
- Most output and jobs are in services. Finance, retail, health, education and technology employ most workers; agriculture employs very few, and manufacturing is a smaller share than it once was.
- High levels of human development. Long life expectancy, near-universal schooling and a high human development index (HDI).
- Slow but stable growth. Mature economies usually grow by only a few per cent a year, because they have already adopted the best available technology and there is less room for catch-up.
- Strong institutions and infrastructure. Reliable legal systems, protected property rights, good transport, power and communications networks.
- Ageing populations. Low birth rates and long lives mean a rising share of older people, which changes what is bought and who is available to work.
Developing economies
A developing economy is one with low average incomes and a lower standard of living, where industrialisation is limited and much of the workforce still depends on agriculture.
Typical characteristics:
- Low income per head, with many people living close to poverty and spending most of their income on food, housing and other essentials.
- A large primary sector. Agriculture and the extraction of raw materials employ a high share of workers, often in small-scale or subsistence farming, and exports are often concentrated in a few primary products.
- Much informal employment: work that is not registered, taxed or protected by employment law.
- Weaker infrastructure and institutions. Unreliable power, poor roads, limited internet access, and sometimes weak enforcement of contracts.
- Lower human development. Shorter life expectancy and fewer years of schooling.
- A young, fast-growing population, so a large future workforce but heavy pressure on schools and jobs now.
Emerging economies
An emerging economy is one moving from developing towards developed status, with rapid economic growth, fast industrialisation and growing integration into world trade and investment.
China, India, Brazil, Indonesia and Vietnam are usually described this way.
What makes an emerging economy distinctive is the speed and direction of change:
- Rapid growth, often 5% to 8% a year or more, well above the developed-economy rate.
- Industrialisation and urbanisation. Workers move from farms to factories and cities; manufacturing and then services grow fast.
- Rising incomes and a growing middle class, with households buying their first car, phone, fridge or branded clothes.
- Large inflows of foreign direct investment (FDI) and a rising share of world exports.
- Uneven development. Modern cities sit beside poor rural areas; infrastructure and regulation often lag behind growth, and inequality can be high.
Examiners have warned that a characteristic of an emerging economy must be distinctive.
"Its economy is growing" is true of most economies, including developed ones.
"Its economy is growing rapidly, at around 6% a year, as manufacturing replaces farming and foreign businesses invest" identifies an emerging economy.
A spectrum, not three boxes
These categories are labels on a continuous scale, and different organisations draw the lines differently.
The International Monetary Fund groups countries as "advanced economies" and "emerging market and developing economies"; the World Bank groups them by income per head into low, lower-middle, upper-middle and high income.
A country can have some features of each type: an emerging economy may have a world-class technology sector in its capital and subsistence farming three hours away.
In an answer, use the evidence in the case (growth rate, income per head, sector of employment, FDI) to show why a country fits a category; never just assert the label.
Why the type of economy matters to a business
Each characteristic leads to a business consequence.
Follow the chains:
1. Income per head decides what can be sold. In a developed economy, demand is large for premium and discretionary goods; in a developing economy, most spending goes on essentials, so products must be cheap, small or sold in single portions. In an emerging economy, demand for discretionary goods is growing fastest, because each rise in income lifts more households above the level at which they can afford them.
2. Growth decides how fast a market expands. A business in a slow-growing developed market wins sales mainly by taking them from rivals. In a fast-growing emerging market, a business can grow simply by keeping its market share while the market expands.
3. Wages and skills decide where to produce. Low wages in developing and emerging economies cut the cost of labour-intensive production, but skills, productivity and infrastructure may be weaker, so a low wage does not always mean a low cost per unit.
4. Institutions decide the risk. Weaker legal systems, sudden policy changes and currency swings make returns in developing and emerging economies less certain. Higher growth usually comes with higher risk.
Products with an income elasticity above 1 (cars, branded clothing, travel, toys) gain most when incomes rise fast, as they do in emerging economies.
Use YED in an answer to explain why rising incomes help one business more than another.
Impact on whom?
The same fact about an economy has different effects on different parties.
Name the party the question asks about and keep to it.
Fact about Sorvana
Impact on Sorvana's economy
Impact on a foreign business selling there
Impact on Sorvana's own businesses
growth of about 6% a year
rising output, jobs and tax revenue
a fast-growing market to enter
rising demand, but new foreign rivals
rising wages in cities
higher living standards
customers who can afford more
rising labour costs, so lost cost advantage
large FDI inflows
jobs, skills and technology
more competition for sites, staff and customers
new customers (as suppliers) and new competitors
- Developed economy: an economy with high income per head and a high standard of living, where most output and employment are in services.
- Developing economy: an economy with low income per head and a lower standard of living, where a large share of the workforce depends on agriculture and primary production.
- Emerging economy: an economy moving from developing towards developed status, with rapid growth and industrialisation and growing integration into world trade and investment.
- Informal employment: work that is not registered with or taxed by the government and not covered by employment law.
Learn each definition as two halves: the income or living-standard half, and the structure or change half.
Both are needed for a full definition.
Vesterhaug Toys has collected these figures.
Classify each economy and give the evidence.
Halvenmark
Sorvana
Taruma
GDP per capita (US$)
53,009.71
13,284.97
1,810.71
Average real GDP growth, 2020 to 2025
1.4%
6.3%
3.1%
Workforce in agriculture
2%
21%
58%
Inward FDI growth, 2023 to 2024
3%
42%
5%
1. Halvenmark has the highest income per head, only 2% of its workforce on farms and slow growth: a developed economy.
2. Sorvana has a middle income per head, the fastest growth by far, a shrinking but still sizeable farm workforce and FDI growing by 42% in a year. The rapid growth together with industrialisation and investment inflows makes it an emerging economy.
3. Taruma has the lowest income per head and 58% of its workforce in agriculture. Growth of 3.1% is respectable but not rapid, and FDI is growing slowly: a developing economy.
Answer: Halvenmark developed, Sorvana emerging, Taruma developing.
What it means for Vesterhaug: Sorvana combines enough spending power for toys with the fastest-growing market.
Taruma's larger population is less useful when most households spend almost everything on essentials.
The chart above shows the growth rates side by side.
Notice that Taruma's economy grows faster than Halvenmark's: growth alone does not make an economy emerging.
The rate and the structural change behind it do.
Explain one feature of Sorvana's economy that shows it is an emerging economy. (4)
Top answer (4 marks). One characteristic is rapid economic growth driven by industrialisation (K).
Sorvana's economy has grown by an average of 6.3% a year since 2020 (A), while the share of its workforce in agriculture has fallen to 21% as people move to factory and city jobs (A).
This means household incomes are rising quickly, so more families can afford goods beyond essentials, which attracts foreign businesses such as toy and car makers to enter the market (An).
Weaker answer (2 marks). "An emerging economy is a country that is developing.
Sorvana's economy is growing, so people have more money."
The definition earns nothing; "growing" is not distinctive (K is doubtful); there is no case fact at all; the consequence is very thin.
What it lacks: the word rapid with a case figure, a second separate case fact, and a consequence developed for someone (households or businesses).
Assess the advantages for Vesterhaug Toys of selling its products in an emerging economy such as Sorvana. (12)
Top answer (Level 4).
The main advantage is market growth.
Sorvana's economy has grown by about 6% a year, and rising incomes in its cities mean a growing number of families can afford toys for the first time.
Toys have an income elasticity above 1, so demand for them grows faster than income: if incomes rise by 6%, demand for toys may rise by 10% or more.
Vesterhaug can therefore increase sales without taking customers from rivals, which is difficult in Halvenmark, where sales have been flat for five years.
A second advantage is spreading risk.
At present Vesterhaug depends on one mature market.
Adding Sorvana means a downturn in Halvenmark would hit only part of its revenue, and the extra volume would spread the fixed costs of design and tooling over more units, lowering average cost (a Unit 3 link to economies of scale).
However, the advantages depend on whether Sorvanan families will pay Vesterhaug's prices.
GDP per capita of $13,284.97 is about a quarter of Halvenmark's, so many families may buy cheaper local toys.
Vesterhaug may need a cheaper range or smaller products, which cuts the margin per toy.
Emerging economies also carry risks that reduce the benefit: infrastructure for delivering to shops outside the main cities may be weak, and if Sorvana's currency falls, revenue converted back into Halvenmark's currency falls with it.
Overall, the advantages are significant because Vesterhaug's home market has stopped growing, and an emerging market with a fast-growing middle class is the most likely source of new sales.
The size of the advantage depends most on how well Vesterhaug adapts its prices to Sorvanan incomes: if it targets only the richest city families at first, the advantage is real but smaller; if it can make a cheaper range profitably, Sorvana could become a major market.
Why Level 4 (9-12): two developed advantages with case facts (growth, flat home market, income per head), theory used (YED, economies of scale), a developed counter-side and a judgement that says what the outcome depends on.
Weaker answer (Level 2, about 4 marks). "Sorvana is an emerging economy, so it has lots of customers.
Vesterhaug will sell more and make more profit.
But there might be competition and different cultures."
Each point is asserted, not explained; the case is barely used; there is no judgement.
How the marks work in Unit 4
Part
Command words and marks
How it is marked
Time
Section A, Question 1 (a) and (b)
one Calculate (4) and one Explain (4), in either order
Knowledge 1, Application 2, Analysis 1
about 6 minutes each
Question 1 (c)
Discuss (8)
three levels; two sides, no conclusion needed
about 12 minutes
Question 1 (d) and (e)
Assess (12) each
four levels; two sides and a supported judgement
about 18 minutes each
Section B, Question 2
Evaluate (20)
four levels; arguments weighed and a conclusion that recommends or judges how far
about 30 minutes
Section C, Question 3
Evaluate (20)
as Question 2, on a different topic and business
about 30 minutes
Every question is compulsory.
The extracts in the Source Booklet are about real businesses and countries, and only the Calculate names an extract letter.
Examiners mark levels items best fit, starting at the middle of the level the answer matches.
A correct calculation with no working earns all 4 marks only with its unit (% or a currency sign); without the unit it earns 3.
Nothing is printed for you: every formula is learned.
When asked for a characteristic of an economy type, make it distinctive and prove it with two separate facts from the extract, one a number (a growth rate, an income figure, an FDI total) and one an event or trend (factories opening, people moving to cities).
Then say what follows for the party in the question.
Do not define the economy type: the definition earns nothing on an Explain.
- Non-distinctive characteristics. "The economy is growing" fits almost every country. Say rapid growth, industrialisation, rising FDI, a growing middle class.
- Treating the labels as fixed boxes. A country can show features of two types. Argue from the evidence in the case, not from the label alone.
- Assuming low wages mean low costs. If productivity is low or infrastructure is poor, the cost per unit may still be high. Wages are only half the calculation.
- Writing about the economy when the business is asked (or the reverse). "Advantages for Vesterhaug" means sales, costs, risk and profit for Vesterhaug, not jobs and tax revenue for Sorvana.
Check your understanding
1. Taruma's government reports that 58% of its workforce works in agriculture and that 61% of its export earnings come from two crops. Explain one feature of Taruma's economy that marks it out as a developing economy. (4) Total [4]
2. A student writes: "Sorvana is an emerging economy because its GDP is growing." Explain why this answer would earn little credit, and how to improve it. (4) Total [4]
3. Discuss the likely effects on Halvenmark's furniture makers of rising incomes in emerging economies. (8) Total [8]
4. Assess the importance of a country's type of economy when a global clothing retailer, Orsana Fashion, chooses where to open its next stores. (12) Total [12]
5. Evaluate whether emerging economies offer better opportunities than developed economies for a global car maker. (20) Total [20]
Answers
1. One characteristic is dependence on primary production (K). 58% of Taruma's workforce is in agriculture (A), and two crops earn 61% of its exports (A). So incomes rise and fall with harvests and world crop prices: a poor harvest or a fall in the price of either crop cuts farm incomes and the country's foreign currency earnings at once, which keeps household spending low and makes Taruma a risky market for foreign businesses (An). Marks: K 1, A 2 for two separate facts, An 1 for the developed consequence.
2. "GDP is growing" is not distinctive: developed and developing economies also grow (K). An emerging economy is marked out by rapid growth together with industrialisation and growing FDI and trade (K). The answer should use evidence from the case: Sorvana's growth of 6.3% a year against Halvenmark's 1.4%, and its farm workforce falling to 21% as factories expand (A). It should then say what follows: incomes are rising fast, so a growing middle class is creating new markets for businesses (An).
3. Benefits: higher incomes in emerging economies increase demand for income-elastic goods such as quality furniture, so Halvenmark makers with strong brands can export to new middle-class buyers; export sales spread risk away from a flat home market. Drawbacks: emerging economies also develop their own furniture industries with lower wage costs, which compete with Halvenmark makers in export markets and at home; rising incomes there also raise demand for timber, pushing up the price of a key raw material. Two sides developed in context: Level 3 (6-8); no conclusion needed.
4. Important: the type of economy shows whether enough households can afford Orsana's clothes (income per head) and how fast that will change (growth rate); an emerging economy's growing middle class means a market that will grow for years, while a developed one is large but saturated with rivals; developing economies may have too few customers at Orsana's price points. Less important / other factors: the label hides big differences inside a country: a developing economy's capital may have a rich district that suits a store; what matters more may be the specific city's income, rents, rivals, and the ease of doing business and political stability (see assessing a country as a market). Judgement: the type of economy is an important first filter because it signals spending power and growth, but the decision depends most on detailed evidence about the target city and its shoppers; a Level 4 answer says this and why.
5. Plan. For emerging: fast-growing demand as millions of households buy a first car (car demand is income elastic, so it grows faster than income); low market penetration means room to grow for decades; production there can be cheaper and avoid import tariffs. Against: lower incomes mean cheaper models with thinner margins; infrastructure (roads, charging networks, dealer networks) may be weak; political and currency risks; strong local rival car makers in some emerging markets. For developed: high incomes support premium and electric models with high margins; stable institutions and established dealer networks; but markets are saturated, growth is slow and competition is intense. Conclusion: emerging economies offer the larger growth opportunity, so for a mass-market car maker they are the better opportunity over ten years; for a premium maker, developed markets remain more profitable in the short run. The answer depends on the car maker's segment and on how stable the chosen emerging economy is; a sharp rise in political risk would reverse the judgement. Level 4 (15-20) with this kind of conditional, supported conclusion.