Traders have many differing approaches to trading the financial markets; technical, fundamental, maybe psychological. But whatever your approach to trading the markets, a good understanding of what moves markets is always going to be important. So, however you trade, it is obviously important to understand the markets you are trading, plus the fundamental basics of the economies that are associated with these markets. This is true whether you are trading commodities, stocks, equity indices, forex, or bond markets.
So, at least some knowledge of the major global economies is going to be a vital ingredient to being a trading success. In this article, therefore, we will look at the world’s ten largest economies and breakdown where they derive their economic strength.
We will look at the economies of:
But before we do, we must first define what we mean by the world’s largest economies and look at how we measure this.
Largest economies by GDP (Gross Domestic Product)
When we talk about the largest economies, we are referring to the largest by Gross Domestic Product, which is usually abbreviated to GDP. GDP is the monetary value of all the goods and services produced by a country or an economy over a period of time. You can read more about GDP as a measure of economic growth here.
Here are the Top Ten!
|GDP in trillion USD (World Bank data*)
1. United States
The United States (US) has been in the prime position of the world’s largest economy since 1890, at that time bettering the United Kingdom. The US has world’s most innovative and technologically advanced economy with firms at the leading edge of technological advances. It has one of the world’s largest amounts of natural resources, including being the largest producer of natural gas and oil.
The New York Stock Exchange and the Nasdaq make up the largest stock exchange by market capitalisation, whilst the US Government Bond market is also the largest in the world.
The US Dollar is seen as the world’s most significant reserve currency and is also a safe haven currency in periods of uncertainty. The US central bank is the US Federal Reserve, and its decisions on monetary policy can have a significant impact on global financial markets, not just those in the US.
The People’s Republic of China is currently the world’s second largest economy by GDP and is a socialist market economy. Economic planning is still undertaken by the state through strategic five-year plans, and state-owned and mixed-ownership enterprises make up a majority of the economy (over 60%). However, there is also a large and expanding private sector which benefits from foreign investment. Since the late 20th century, China has regularly topped the tables for the fastest growing economy with growth rates averaging over 10% for over three decades.
China is the world’s largest manufacturer of goods, the world’s biggest exports of goods, but is also the second largest importer of goods, with the world’s quickest growing consumer market.
China has three of the top ten stock exchanges on the world by trading volume and market capitalisation (in Shanghai, Shenzhen and Hong Kong). Its bond market is only behind the US in size. The Chinese currency is the Renminbi, denominated as the Yuan, which is held in a floating exchange-rate system managed primarily against the US dollar within a basket of currencies, which is allowed to fluctuate by 0.5% on a daily basis.
By many forecasts, China is anticipated to overtake the US as the world’s largest economy before 2030.
Japan has the world’s third-largest economy by GDP. It has a strong service sector and manufacturing bases, though the latter has declined from the strengths of the second half of the 20th century.
The Japanese stock market is the world’s fifth largest. The Japanese Yen is often seen as the world’s ultimate safe haven currency for a number of reasons. These include its neutral position from a military standpoint, the fact that in the long run the economy has both a budget and trade surplus, and due to the high saving rates and repatriation impacts.
Since end of the 20th century, the Bank of Japan has been adhering to or close to a zero-interest rate policy. A declining population since 2010, alongside an ageing population, is a significant challenge to the Japanese economy moving further into the 21st century.
Number four on our list and the largest economy in Europe, Germany is one of the world’s largest exporters. Approximately 70% of GDP comes from services and nearly 30% from industry, with major exports including vehicles, chemical goods, machinery, pharmaceuticals, and electronic products. Germany is part of the EU and introduced the Euro as its currency on 1st January 1999. Monetary policy in Germany is dictated by the European Central bank (ECB).
5. The United Kingdom
The United Kingdom (UK) is fifth on our list, but regularly swaps with India and France depending on year and measurement. The UK is a truly global economy which is dominated by the service sector which makes up over 80% of GDP, of which the financial service sector and The City of London is extremely important. London is still the world’s second largest financial centre behind New York.
Despite the UK leaving the EU in 2020, a large percentage of trade still remains with EU member nations, around 50%. The Pound is the worlds’ fourth largest reserve currency, and the Bank of England sets the UK’s monetary policy.
Number six on the list is India, with the Indian economy growing in the 21st century by 6-7% a year. A large percentage, around 65-70% of India’s GDP comes from domestic, private consumption, with the world’s sixth largest consumer market. The service sector is the fastest-growing sector and accounts for over 50% of GDP.
The Reserve Bank of India (RBI) is the central bank, and the currency is the Indian Rupee.
The seventh largest economy in the world at time of the press is France, and the third largest in Europe behind Germany and the UK. Although the service sector dominates at over 75% of GDP, the manufacturing/ industrial sector accounts for around 20%. A large proportion of the GDP, about a third, is produced by the Paris metropolitan area, with Paris as one of the world’s largest GDP-producing cities.
As with Germany, France is a major part of the EU and, on 1st January 1999, adopted the Euro as its currency. The European Central Bank sets the French monetary policy.
The fourth European city on our list, the third largest in the EU by GDP, Italy is number eight in the world ranking at the time of writing. Approximately 60% of trade is done within the EU, primarily with Germany and France, but does significant trade with the US, UK and Switzerland. Italy is the sixth largest manufacturing economy globally, which includes automobiles, pharmaceuticals, machinery, clothing, food and furniture. Italy is also the world’s largest wine producer.
As with France and Germany, Italy is an EU member state with the Euro as its currency since 1st January 1999, and monetary policy is set by the ECB.
The 9th largest economy on the planet by GDP is Canada, and as with many economies on our list, Canada has an economy that relies heavily on its service sector, but also has an important primary sector. Canada is estimated to have the third largest value of natural resources on the planet and is also has the world’s third largest oil reserves, being the fourth largest exporter of oil. For this reason, the price of oil can have a significant impact on the Canadian economy and also on the Canadian Dollar, which is affectionally known as the Loonie in the Forex world, after the Canadian bird the Loon, which features on the Canadian one-dollar coin. Monetary policy is set by the Bank of Canada.
10. South Korea
And coming in at number 10 on our list is South Korea, which has seen accelerated growth from the latter 20th century after the Korean War, and still enjoys strong growth rates into the 21st century amongst developed economies. The growth in manufacturing has shifted in this century towards higher-technology industries, such as bioengineering, robotics, aerospace, and microelectronics.
The Bank of Korea control monetary policy and the South Korean currency is the South Korean Won. The ongoing conflict with North Korea can have negative impacts on the economy and South Korean financial markets and the currency.
So, we have looked at the planet’s ten largest economies by GDP and looked at their economic strength comes from. Although the United States remains top, it is likely only a matter of time, probably in the 2020s, before China becomes the world’s largest economy. And India is likely to continue its way up the league table and push further above some of the European economies and even challenge Japan.
We trust this article has helped you better understand the world’s largest economies and assists you with your trading.
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