Growing Economies

The Growing Economic Power of Emerging Economies

Economic power comes from the size of an economy: a bigger one buys and sells more and has more say in trade talks. Since 2000, that power has shifted towards the emerging economies (unit 2.4.2).

Purchasing power parity (PPP): a way of comparing countries' output that adjusts for differences in prices, so that a dollar buys the same amount in each country.

Source: World Bank, GDP at purchasing power parity (data updated October 2026).

China and India

China has been the world's largest economy measured at PPP since 2014, and India is now the third largest. China's growth came from manufacturing for export. India's has leaned more on services, such as IT and call centres, sold to firms abroad.

Africa and Other Emerging Markets

Sub-Saharan Africa's share of world output has barely moved, but its population almost doubled between 2000 and 2025, to 1.3 billion: a fast-growing market and workforce. Many African economies rely on exporting oil and metals, so their growth rises and falls with world prices.

Elsewhere, Vietnam and Indonesia have attracted factories as wages in China rise. Vietnam's real GDP grew by an average of 6.4% a year over the same period, against 1.5% in the UK.

Implications of Economic Growth for Individuals and Firms

Trade Opportunities for Firms

When emerging economies grow:

• Exporters gain new customers: incomes rise in China and India → demand for imported goods and services grows → UK firms sell more abroad → higher revenue, and economies of scale from the larger market.
• Firms buy inputs more cheaply: emerging economies make components at low cost → UK firms import them → lower unit costs → higher margins or lower prices.

Rationalisation Opportunities for Firms

Rationalisation: reorganising a business to cut its costs, for example by closing sites, cutting jobs or moving production elsewhere.

Growing economies give firms new places to produce. A UK clothing brand might close its own factory and buy from suppliers in Bangladesh instead. Production moves to a lower-cost country → unit costs fall → the firm can cut prices or raise its profit margin.

Shifting Employment Patterns

As economies grow, workers move from farming into manufacturing, then into services. In China, the share of workers in agriculture fell from half in 2000 to about a fifth in 2025. In the UK, the share working in industry fell from a quarter to about a sixth, while services rose to over 80%.

• Workers in emerging economies: factories open in towns and cities → people leave low-paid farm work for factory jobs → higher wages → higher living standards for them and their families.
• Workers in the UK: manufacturing moves to lower-cost countries → factory jobs go → workers whose skills don't suit the growing service sector face unemployment or lower pay.

The effect on a firm or worker depends on:

• What the firm sells: a firm whose product is wanted in emerging markets gains a bigger market. One competing on price with low-cost producers is more likely to lose.
• Skills and flexibility: workers who can retrain move into growing industries. Those who can't, or who live where the old jobs were, can stay out of work for years.

Rising Incomes

Growth raises average incomes. Between 2000 and 2025, real GDP per capita rose about six times in China and more than three times in India, while the UK's rose by about a fifth (World Bank).

Rising incomes lift people out of extreme poverty. In 1990, 83% of China's population lived on less than $3 a day (adjusted for prices); by 2019, almost no one did. In sub-Saharan Africa the figure was still 45% in 2024.

When incomes in emerging economies rise:

• A new middle class spends more: incomes rise → spending moves from basic food towards cars, branded goods, holidays and education → demand for income-elastic products grows fastest (unit 2.2.4) → firms selling them, such as Scotch whisky makers or UK universities, earn more from abroad.
• Labour costs rise: wages rise with incomes → producing in that country costs more → its cost advantage shrinks → some firms move production on to cheaper countries or invest in machinery to replace workers.

Converting Nominal Values to Real Values

Comparing incomes over time means removing the effect of rising prices first (unit 2.5.3).

Nominal value: a value measured in the prices of the time, not adjusted for inflation.

Real value: a value adjusted for inflation, so it shows the change in the amount that can be bought or produced.

To convert a nominal value into a real one, divide by a price index and multiply by 100: \[ \text{Real value} = \frac{\text{Nominal value}}{\text{Price index}} \times 100 \]

The answer is in the prices of the price index's base year. If wages double while prices double, real wages have not changed.

Calculating and Interpreting Index Numbers

Index number: a value expressed relative to a base year, which is set at 100: \[ \text{Index} = \frac{\text{This year's value}}{\text{Base year's value}} \times 100 \]

An index above 100 shows a rise since the base year, and one below 100 a fall. Index numbers make very different figures easy to compare. With 2000 = 100, China's real GDP reached about 687 by 2025, India's 461 and the UK's 145.

The gap between an index and 100 is the percentage change since the base year. Between any two other years, find the percentage change from the old index number to the new one: \[ \%\ \text{change} = \frac{\text{New} - \text{Old}}{\text{Old}} \times 100 \]