classification of economies in terms of their level of national income

Economic Development – Classification of Economies by National Income

The Cambridge International AS & A Level Economics (9708) syllabus expects students to understand how economies are grouped by national‑income levels, the indicators used, the typical structural characteristics of each group, and the policy and analytical implications of the classification.

1. Monetary Indicators

1.1 Key Definitions

• Gross Domestic Product (GDP): market value of all final goods and services produced within a country’s borders in a given year.
• Gross National Income (GNI): GDP + net factor income from abroad (NFIA).
  \[ \text{GNI}= \text{GDP}+ \text{NFIA} \]
• Net National Income (NNI): GNI – depreciation of the capital stock.
  \[ \text{NNI}= \text{GNI}-\text{Depreciation} \]
• Purchasing‑Power‑Parity (PPP) adjusted income: adjusts GNI per‑capita for differences in price levels, allowing more meaningful cross‑country comparisons.

1.2 Per‑Capita Measures

Expressing a monetary indicator on a per‑person basis reflects average living standards:

\[ \text{Indicator per capita}= \frac{\text{Indicator (GDP, GNI or NNI)}}{\text{Population}} \]

2. World Bank Income‑Group Classification (2024 thresholds)

Income Group	GNI per capita (US$, current prices)	Typical Economic & Social Features	Illustrative Countries (2023)
Low‑income	≤ $1,155	> 70 % employed in agriculture Weak industrial base, limited services High poverty, unemployment and informal‑sector activity Poor infrastructure and low human‑development outcomes	Afghanistan, Burundi, Malawi
Lower‑middle‑income	$1,156 – $4,555	Manufacturing and export‑oriented sectors expanding Rapid urbanisation; > 30 % of population in cities Improving health and education, but still below global averages Growing foreign direct investment (FDI)	India, Nigeria, Vietnam
Upper‑middle‑income	$4,556 – $14,205	Diversified economies; strong services and high‑value manufacturing HDI typically 0.65–0.80 Broad access to technology, finance and higher education Transitioning toward knowledge‑based activities	Brazil, China, South Africa
High‑income	> $14,205	Advanced technological infrastructure and high R&D intensity Very high living standards; extensive welfare and safety nets Predominantly service‑oriented economies Strong institutions, rule of law and regulatory frameworks	United Kingdom, United States, Japan

3. Composite & Non‑Monetary Development Indicators

Indicator	Components	Relevance to Income Classification
Human Development Index (HDI)	Life expectancy, mean years of schooling, GNI per capita (log)	Shows how health and education progress alongside income.
Multidimensional Poverty Index (MPI)	Deprivation in health, education and standard of living	Highlights pockets of poverty that can exist in any income group.
Mean Years of Schooling (MEW)	Average number of years of education for adults	Strong correlation with labour‑productivity growth.
Kuznets Curve	Hypothesised inverted‑U relationship between income and inequality	Explains why many lower‑middle‑income economies experience rising inequality before it falls.

4. Income‑Distribution Measures

4.1 Gini Coefficient

Quantifies inequality on a scale from 0 (perfect equality) to 1 (perfect inequality):

\[ \text{Gini}= \frac{\displaystyle\sum_{i=1}^{n}\sum_{j=1}^{n}|y_i-y_j|}{2n^{2}\mu} \] where \(y_i\) is the income of individual i, \(n\) the population size and \(\mu\) the mean income.

4.2 Lorenz Curve

A graphical representation of cumulative income share (vertical axis) against cumulative population share (horizontal axis). The farther the curve lies from the line of equality, the higher the Gini coefficient.

5. Poverty Concepts (Absolute vs. Relative)

• Absolute poverty: a condition in which people lack the basic necessities of life (food, shelter, clean water). It is measured against a fixed threshold (e.g., the World Bank’s $2.15 a day line).
• Relative poverty: a condition in which people’s income or consumption is significantly below the average standard of living in their own society. It is usually expressed as a percentage of median household income (e.g., < 60 % of median in many OECD definitions).

Both concepts are examined in the syllabus (11.3.4). Absolute poverty is more common in low‑income economies, whereas relative poverty becomes a key concern for middle‑ and high‑income economies.

6. Demographic & Structural Characteristics by Income Group

Feature	Low‑income	Lower‑middle‑income	Upper‑middle‑income	High‑income
Population growth rate	≥ 2 % (high fertility)	1–2 %	0.5–1 %	≤ 0.5 % (often ageing)
Urbanisation	≤ 30 % urban	30–55 % urban	55–75 % urban	> 75 % urban
Sectoral employment (% of labour force)	Primary ≈ 70 %	Primary ≈ 45 %, Secondary ≈ 30 %	Secondary ≈ 25 %, Tertiary ≈ 55 %	Tertiary ≈ 80 %+
Life expectancy (years)	≤ 60	60–70	70–78	> 78
Literacy rate	≤ 65 %	65–80 %	80–95 %	> 95 %

7. Policy Implications of Income Classification

How a country is classified influences the design and focus of economic policy, external assistance and private‑sector decisions.

• Aid eligibility and concessional financing: The World Bank, IMF and many bilateral donors reserve low‑ and lower‑middle‑income status for concessional loans and grants (e.g., IDA credits, GPE programmes).
• Fiscal‑policy mix:
  • Low‑income economies: priority on basic infrastructure, health, primary education and macro‑stabilisation (e.g., controlling inflation, building fiscal buffers).
  • Middle‑income economies: shift toward structural reforms, tax‑base broadening, human‑capital investment and industrial policy.
  • High‑income economies: fine‑tuning of fiscal stance, progressive taxation, social‑security sustainability and managing ageing‑related expenditures.
• Exchange‑rate and external‑sector policy: Low‑income states often maintain fixed or heavily managed rates to stabilise import prices; middle‑income countries may adopt more flexible regimes as export diversification grows; high‑income economies usually operate under floating rates and focus on capital‑account management.
• Regulatory and institutional environment: Higher‑income groups tend to have stronger property rights, rule of law and financial‑sector regulation, which affect both domestic investment and foreign‑direct investment (FDI) inflows.

8. Links to Other Syllabus Topics (11.3.1 – 11.3.4)

• Balance of Payments & Exchange‑Rate Policy: Income groups display distinct current‑account patterns (commodity exporters vs. diversified manufacturers) and adopt different exchange‑rate regimes.
• International Trade: Structural transformation – as income rises, the composition of exports shifts from primary commodities to manufactured and service‑intensive goods.
• Foreign Aid & Development Assistance: Classification determines eligibility for concessional financing and technical assistance.
• Macroeconomic Policy: The policy mix (stabilisation vs. structural reform vs. fine‑tuning) varies systematically with income group.
• Investment Decision‑Making: Private investors use the income classification to assess country risk, expected returns and institutional quality.

9. Illustrative Calculation

Example: Country X has a GDP of $300 billion and a population of 50 million.

\[ \text{GDP per capita}= \frac{300\,\text{bn}}{50\,\text{million}} = \$6,000 \]

Net factor income from abroad is $20 billion (receipts) and $-180 billion (payments), so NFIA = $20 bn – $180 bn = –$160 bn.

\[ \text{GNI}= 300\,\text{bn} + (-160\,\text{bn}) = \$140\,\text{bn} \] \[ \text{GNI per capita}= \frac{140\,\text{bn}}{50\,\text{million}} = \$2,800 \]

With a GNI per capita of $2,800, Country X falls into the lower‑middle‑income group (2024 threshold $1,156 – $4,555).

10. Quick Revision Checklist

• Recall the four World Bank income groups and the 2024 GNI‑per‑capita thresholds.
• Be able to calculate GDP, GNI and NNI per capita and to adjust for PPP.
• Know the components of HDI, MPI and MEW and why they complement monetary measures.
• Understand how to compute and interpret the Gini coefficient and Lorenz curve.
• Define absolute and relative poverty and give an example of each.
• Identify the typical demographic and structural features of each income group.
• Explain the policy implications of classification (aid eligibility, fiscal mix, exchange‑rate regime, institutional quality).
• Link income classification to trade patterns, balance‑of‑payments behaviour, macro‑policy choices and investment decisions.

11. Summary Mapping Table (Syllabus Sub‑Points ↔ Content)

Syllabus Sub‑point	What to Cover
11.3.1 – Classification of economies by national‑income groups	World Bank thresholds, four income groups, illustrative countries.
11.3.2 – Monetary & composite indicators	GDP, GNI, NNI, PPP; HDI, MPI, MEW, Kuznets curve; formulas and interpretation.
11.3.3 – Income‑distribution tools	Gini coefficient (formula), Lorenz curve (sketch), relationship to income groups.
11.3.4 – Poverty concepts & demographic/structural characteristics	Absolute vs. relative poverty; population growth, urbanisation, sectoral employment, life expectancy, literacy.
Links to other syllabus topics	Balance of payments, trade, aid eligibility, macro‑policy mix, investment decisions – explained in Section 8.

Suggested Diagram (for revision)

A single bar chart showing the four income groups with their GNI thresholds, a representative country for each bar, and a small inset comparing a low‑inequality Lorenz curve (high‑income) with a high‑inequality Lorenz curve (low‑income).