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Jun 7, 2017

Developed vs. Emerging Economy: What’s the Difference?

By Team Stash

Both represent unique investment opportunities. Here’s a closer look at both.

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Chances are if you’re reading this, you live in what’s known as a developed economy, vs an emerging economy.

You have a standard of living that’s higher than most of the world, with all that entails: advanced manufacturing and services, jobs with a higher income, a stable political system, infrastructure that allows you to move around with ease, even electricity and water when and where you want them.

These things are not always a given for the rest of the globe.

Many other countries are far less affluent, and many are what’s known as emerging economies. In these countries, manufacturing may not be as developed, on average people earn dramatically less money annually, and things like infrastructure may be more rudimentary.

But both developed and emerging markets represent unique investment opportunities.

Here’s a closer look at both.

Developed nations

There are roughly 30 developed nations. In addition to the U.S., these include the Western European countries such as the United Kingdom, France, and Germany. In Asia, Japan is considered an advanced economy.  And in North America, besides the U.S., Canada is also considered a developed nation.

Much of the west began industrializing in the 19th century. As a result, developed nations have some of the most advanced factories and manufacturing processes in the world. They also have more built out infrastructure, from airports to railways and highways. Access to new forms of infrastructure–like the Internet–may also be higher.

One of the biggest differences between a developed nation and an emerging economy is what people earn, sometimes referred to as per capita income. In the U.S., for example the average annual per capita income is $56,000. In India, annual per capita income is only about $1,600. Consequently, developed economies tend to consume more products and services.

Emerging economies

There are also roughly 30 emerging market economies primarily in Africa, Eastern Europe and Asia. Some of the largest emerging nations are referred to as the BRIC nations of Brazil, Russia, India, and China.  But there are as many as two dozen others, including Malaysia, Mexico, South Africa, Taiwan, Turkey, and Vietnam.

(China is something of a paradox. It’s the world’s second largest economy, but it’s also considered a developing nation.)

Generally speaking, these countries are less affluent, and the standard of living tends to be lower. Literacy may not be as high as in developed countries, and there also can be less political and economic stability. The currency of these countries can also be subject to dramatic swings, which can affect investments.

Manufacturing tends to be less advanced, and it tends to focus on components that find their way into finished products made elsewhere. Many of these countries also supply natural resources that are necessary in manufacturing, such as petroleum, wood and non-precious metal.

Why the distinction matters

Generally speaking, your investments may be safer in industrialized countries with developed economies. But growth potential for companies in these countries may be smaller.

By contrast, for emerging nations whose industrialization process is just beginning, the potential for fast growth is much higher, although risks are too. By some estimates, as much as three quarters of global growth and consumption could be driven by emerging economies.

At the same time, developing economies are often more dependent on circumstances in more developed nations. Economic boom times in Western Europe, for example, could also give a lift to emerging economies. When recessions hit developed nations, that can have a negative impact on developing nations, because demand falls.

Investment experts recommend having a diversified portfolio that balances risk with holdings in different regions and different kinds of economies around the globe.

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