Work

A simple measure of economic complexity

Year: 2023

Type: article

Abstract: Contrary to conventional economic growth theory, which reduces a country's output to one aggregate variable (GDP), product diversity is central to economic development, as recent “economic complexity” research suggests. A country's product diversity reflects its diversity of knowhow or “capabilities”. Researchers proposed the Economic Complexity Index (ECI) and the country Fitness index to estimate a country's number of capabilities from international export data; these measures predict economic growth better than conventional variables such as human capital. This paper offers a simpler measure of a country's knowhow, Log Product Diversity (or LPD, the logarithm of a country's number of products), which can be derived from a one-parameter combinatorial model of production in which a set of knowhows combine with some probability to turn raw materials into a product. ECI and log-fitness can be interpreted theoretically (using the combinatorial model) and empirically as potentially noisy estimates of LPD; moreover, controlling for natural resources, the simple measure better explains the cross-country differences in GDP and in GDP per capita.

Source: Research Policy

DOI: 10.1016/j.respol.2023.104793

Author: Sabiou Inoua

Institution: Chapman University

Language: English

Topic: Economic and Technological Innovation

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,710

Funder: Charles Koch Foundation