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# The Global Market and Developing Nations: Production and Income Classifications

## Production and Income Classifications

Another quantitative method of classifying national economies is by per capita GDP or per capita income. In 2000, the approximate average per capita GDP for the three levels of nations broke out as follows:

Table 19.1  Per Capita GDP for National Economies
Type of NationPer Capita GDP
Developed Nations\$19,000
Newly Industrialized Nations11,500
Less Developed Nations3,400
##### EconoTalk

The 80-20 Rule states that 80 percent of an effect is attributable to 20 percent of the cause. For instance, 80 percent of a company's sales come from 20 percent of its sales force, or 80 percent of its profits come from 20 percent of its products.

The formal name for this rule is the Pareto Principle, named for the Italian economist Vilfredo Pareto (1848-1923), who realized that 20 percent of his country's population owned 80 percent of its wealth. The Pareto Principle is not really a statistically proven “rule.” It's really a rule of thumb (because your thumbs account for 20 percent of your fingers, but do 80 percent of their work).

As the table shows, developed nations enjoy five and a half times the per capita GDP of developing nations. Newly industrialized nations have over three times the per capita GDP of less developed nations.

You may recall that in the United States, households in the top 20 percent, the highest income quintile, earn almost 50 percent of the nation's income. The other 80 percent of the population divide up the other 50 percent. I presented this as an indicator of income inequality in the United States.

Income inequality on a worldwide level is even more pronounced. The top 20 percent of the world's population earns about 80 percent of its income. While this may be yet another instance of the 80-20 Rule, it also means that 80 percent of the population is getting by on 20 percent of the world's income.

The World Bank classifies countries into high income, upper middle income, lower middle income, and low income groups. The average incomes for each group, in 1995 U.S. dollars, and examples of nations in each group, are as follows:

Table 19.2  World Bank Income Classifications
World Bank ClassificationAverage Income
High Income\$22,818 (United States, Western Europe, Japan)
Upper Middle Income 5,175 (Argentina, Mexico, Poland, Hungary)
Lower Middle Income 1,808 (Costa Rica, Philippines, Romania, Jordan)
Low Income 388 (Sub-Saharan Africa, India)

Here are the numbers and percentages of the world's population in each of these groups:

Table 19.3  Population and Percentage of World's Population in World Bank Income Classifications
Population(thousands)Percentage
High Income 955,000 15.6
Upper Middle Income 503,700 8.2
Lower Middle Income2,163,500 35.3
Low Income2,511,400 40.9
Total6,133,600100.0

Here are selected characteristics I've chosen from those compiled by the World Bank on the four groups of economies. (You can find more of these data, which are called competitiveness factors, at worldbank.org/psd/compete.nsf.)

Table 19.4  Characteristics of World Bank Classifications
Upper IncomeUpper MiddleLower MiddleLow Income
Average per capita income22,8185,1751,808388
Percent of world pop.15.68.235.340.9
Life expectancy (years at birth)76.870.168.154.6
Manufactered Exports as % of Total Exports73.852.643.228.0
Phone lines per 1,000 people48718011317
Waiting time for phone line (years)0.031.854.515.31
Televisions per 1,000 people49029320565.1
Personal Computers per 1,000 people17035112
Scientists & technicians per 1,000 people3.31.01.30.4
Patent Applications76,50718,80110,008336

These data speak for themselves. They show the correlation between technological and communications infrastructure (telephones and so on) and economic success. They also show the importance of investment in human capital in terms of literacy and scientific and technical education. The low life expectancy in low income countries indicates the lack of adequate nutrition and health care, and a high infant mortality rate.

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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