Understanding knowledge economy

The knowledge economy is a system of consumption and production that is based on intellectual capital. In particular, it refers to the ability to capitalize on scientific discoveries and basic and applied research. This has come to represent a large component of all economic activity in most developed countries. In a knowledge economy, a significant component of value may thus consist of intangible assets such as the value of its workers’ knowledge or intellectual property.

Less developed countries tend to have agriculture and manufacturing-based economies. A developing country has a manufacturing and service-based economy, and developed countries tend to have service-based economies. Most countries’ economies are composed of each of these three major categories of economic activity, but in differing proportions relative to the wealth of that country. Examples of knowledge economy activities include research, technical support, and consulting.

In the Information Age, the global economy has moved toward the knowledge economy, bringing with it the best practices from each country’s economy. Also, knowledge-based factors create an interconnected and global economy where sources of knowledge, such as human expertise and trade secrets, are crucial factors in economic growth and are considered important economic resources. However, it is important to note that generally accepted accounting principles (GAAP) do not allow companies to include these assets on their balance sheets. The knowledge economy addresses how education and knowledge—that is, “human capital,” can serve as a productive asset or business product to be sold and exported to yield profits for individuals, businesses, and the economy. This component of the economy relies greatly on intellectual capabilities instead of natural resources or physical contributions. In the knowledge economy, products, and services that are based on intellectual expertise advance technical and scientific fields, encouraging innovation in the economy as a whole.

Academic institutions, companies engaging in research and evelopment (R&D), programmers developing new software and search engines for data, and health workers using digital data to improve treatments are all components of a knowledge economy.

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