On what basis did we divide the world into The First world, second world and the Third world?

The original distinction was "old world" (= Europe, Africa, Asia) and "new world" (=America, essentially).
As @CountScrofula already said, the 1st, 2nd, 3rd world distinction arose in the cold war; 1st world = NATO and allies; second world = Warsaw Pact countries; 3rd world countries are those that are neither aligned with NATO or Warsaw Pact.