Final answer:
The World Bank classifies the world's economies based on GNI, GDP, and other factors such as demographics and environmental health. It also uses purchasing power parity to normalize for cross-country price differences, providing a framework for understanding economic trends and global wealth distribution.
Step-by-step explanation:
The World Bank revises its classification of the world's economies based on estimates of a nation's per capita gross national income (GNI), along with other factors such as demographics and environmental health. This helps to determine whether a nation is categorized as high income, middle income, or low income. The classification matters because it affects the type of financial assistance and advice that countries receive for economic development.
In its approach, the World Bank also considers Gross Domestic Product (GDP), which encompasses the total income of residents, the value of goods and services produced, and government spending within a country's borders over a year. GDP is a critical measure of a country's productivity and economic performance. Notably, the classifications of countries can evolve as their economies grow or shrink, exemplified by changes in statuses for countries like Nepal, Indonesia, and Myanmar, or downturns such as those possibly facing Myanmar following its 2021 coup.
To account for the diversity and comparability of national economies, it's important to use purchasing power parity (PPP), which adjusts for price differences of the same goods across countries. Despite its limitations and dependence on estimates, the World Bank's economic classification system provides a useful framework for understanding global economic trends and the distribution of wealth and poverty across the world.