What are the biggest economies in the world? What are some current challenges affecting the world economy? The world economy is not only important for economists. The growing global interdependence means that an economic crisis in one country can have spillover effects on the rest of the world and that one country’s economy can affect a whole region. In what follows, we will take a look at the world economies, how they work, and how they are related.
Global economy
The global economy is the global economic system that accounts for all human activity.
The global economy is the aggregate economic output, movements, and influence of all countries.
When we talk about the global economy, we generally include all economic activities such as production, consumption, and the exchange of financial values within and between countries.
Why is the global economy important?
Collecting data on a global scale can be time consuming and expensive, so why do economists even bother?
The largest 20 economies in the world account for 90% of global GDP and 80% of international trade.1 The five biggest economies have the potential to impact the global economy. Because of how big these countries are and how interdependent our economies are, any economic, social, or political downturn or disaster in any one of these five countries has the potential to shake the global economy.
World economies ranking: global economic powerhouses
There are many big economies in the world. The rankings of each country's economies are primarily based on their GDP and GDP per capita.
GDP (gross domestic product) is the total value of final goods and services produced in an economy over a given period.
GDP per capita is a measure of an economy’s national output/income per person. It shows the prosperity of a country and roughly indicates the average living standards in that country.
We will look at the top 5 biggest economies in the world and discuss their share and impact on the global economy.
If you want to learn more about GDP and GDP per capita, check out our explanation of the Gross Domestic Product.
The top five biggest world economies by GDP
It’s no surprise that the United States is the largest economy in the world. Its nominal GDP is $20.89 trillion. Per capita, it is at $63,413. The biggest contributor to its GDP comes from the service sector which includes real estate, financial services, and healthcare.2
The second-largest economy is China. Its nominal GDP is $14.72 trillion but adjusted for its large population, its GDP per capita is $10,434. The opening of the Chinese economy has significantly impacted the increase in China’s economic growth and development. It has allowed for a more flexible market and an increased flow of foreign direct investment (FDI).3
Japan is the third-largest economy in the world, with a nominal GDP of $5.06 trillion. The GDP per capita is $40,193. Despite its Lost Decades, Japan’s economy has still grown thanks to its advanced technology and manufacturing industries.4
Germany is the fourth-largest economy. Its nominal GDP is $3.85 trillion and its GDP per capita is $46,208. Germany is Europe’s largest economy. The manufacturing industry has had the largest impact on the country’s economic growth.5
The United Kingdom is the fifth-largest economy in the world. The nominal GDP is $2.76 trillion and adjusted for the size of the population, the GDP per capita is $41,124. Economic growth is primarily driven by the financial sector: investment banks, insurance, and other business services.6
Figure 1. Percentage share of the global economy, StudySmarter Originals. Created from World Bank
As you can see in Figure 1, these five economies contribute to 55.8% of the global economy. It is clear then that any economic slowdown in these countries will severely affect the rest of the world.
One example of the interconnectedness of the world economies is the 2008 Financial Crisis. The US and UK economies were deeply impacted and this resulted in an economic slowdown in many other countries.
Current world economic issues
Each of the previously mentioned top five countries has its own economic challenges. Despite their own challenges, there are economic, social, and political issues that impact the global economy. We will discuss four of them:
- Rising inflation
- Rising geopolitical tensions
- Climate change
- Low economic growth
World Economies: Rising inflation
This is a challenge affecting nearly every country. In 2022, the UK and the US have reported the highest inflation rates in nearly 30 years.
There are many factors influencing the rise in inflation. Some are because of the 2020 Covid-19 pandemic and the transition to a greener global economy.
High inflation impacts consumer spending as most goods and services become much more expensive, especially if wages aren’t adjusted for inflation.
High prices will significantly impact the poor and will widen the inequality gap between rich and poor.
For investors, higher inflation erodes their investment returns and for businesses, the costs of production will increase.
World Economies: Geopolitical tensions
As we already said the world is connected and countries are dependent on each other. This has increased even more due to globalisation.
In economics, Globalisation is the ever-increasing integration process of the world’s economies into a single market.
Any political tension in one country or between two countries has the possibility of impacting trade relationships around the world. Any restriction of trade is sure to produce shortages and lower economic growth globally.
World Economies: Climate change
The impacts of climate change are predicted to cut the annual economic output by $23 trillion.7 Failing crop yields, the spreading of diseases and rising sea levels are set to impact wealth, investment levels, and global economic growth if policies are not implemented quickly to counteract the problems.
This will disproportionately impact developing countries more than developed countries. They will be exposed to warmer temperatures and have fewer resources available (finance, infrastructure, etc.) to adapt to the changing climate.
World Economies: Low economic growth
This is an increasing concern due to the many factors that impact economic growth. The 2020 Covid-19 pandemic has impacted many economies and economists wonder if there will ever be a full recovery from the pandemic.
To learn more about an economic recovery, check out our Economic Cycle article.
Additionally, other global issues that we discussed, like climate and political tensions will also impact global economic growth.
Structure of the world economies
There are many interesting economies that we will discuss in further articles in detail. Here we will just give you an overview of each country’s economy and what you can expect to learn.
World Economies: Singapore economy
The Singapore economy has changed dramatically over the past 50 years. Singapore was a developing economy filled with unemployment, a low skilled labour force, and unfavourable conditions for investors.
Now the country has a developed free-market economy. It attracts foreign investors and is a competitive economy.
In our article on the Singapore Economy, you will be able to see how Singapore turned its economy into a global powerhouse and a hub for investment.
World Economies: South Korean economy
The South Korean economy is another example of a country that was able to change its economy. South Korea has experienced large amounts of growth in a short period of time.
The South Korean Economy article will discuss this and more.
World Economies: Chinese economy
As previously mentioned, China is the second-largest economy in the world. In the Chinese Economy article, you will learn how China was able to move from a closed economy to an open economy. You will see what has contributed to its large economic growth and output as well as its economic forecast.
World Economies: United Kingdom economy
Despite the fact that the UK is the world’s fifth-largest economy, the country has been under complications due to the Covid-19 pandemic and the 2016 vote to leave the EU which is known as Brexit.
This will all be discussed in three explanations: United Kingdom Economy, Impact of Brexit on the UK Economy, and Impact of Brexit on the EU Economy.
The UK is a very interesting case study and real-life example to remember for your exams!
World Economies: Nordic model
The Nordic Model is the model adopted by the five Nordic countries: Finland, Iceland, Sweden, Finland, and Denmark. In this article, you will learn more about a mixed market economy, how the Nordic model compares to other countries, and the advantages as well as criticism of the model.
World Economies: Cuban economy
The Cuban economy is one with an interesting history. In the Cuban Economy article, you will learn more about the country’s economy, its history, and its predicted future.
World Economies: Indian economy
The Indian economy has grown over the past few years. It is now the sixth-largest economy in the world, yet has a significantly low GDP per capita. The characteristics of the Indian economy and how economic growth was boosted are discussed in the Indian Economy explanation.
World Economies: German economy
As we already mentioned, the German economy is the largest economy in Europe and is the fourth-largest economy in the world. Its highly skilled labour force and comparative advantage in manufacturing have given the German economy a boost. Yet it faces some demographic challenges that could potentially restrict its economic growth in the future. All of this is covered in the German Economy explanation.
World Economies - Key takeaways
- The global economy is the aggregate economic output, movement, and influence of all countries.
- The five biggest economies contribute so much to the global economy that any economic, social, or political downturn/disaster in any one of these countries has the potential to shake the global economy.
- The United States of America is the largest economy in the world.
- The top 5 biggest economies in the world are the US, China, Japan, Germany, and the UK.
- Rising inflation, rising geopolitical tensions, climate change, and low economic growth are some of the issues that impact the global economy today.
Sources
1. ‘What is the G20’, G20 Foundation.
2. World Bank, GDP (current US$) United States, 2020.
3. World Bank, GDP (current US$) China, 2020.
4. World Bank, GDP (current US$) Japan, 2020.
5. World Bank, GDP (current US$) Germany, 2020.
6. World Bank, GDP (current US$) United Kingdom, 2020.
7. Christopher Flavelle, ‘Climate Change Could Cut World Economy by $23 Trillion in 2050, Insurance Giant Warns’, The New York Times, 2021.
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