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.
Inoua, S. M. (2021). A simple measure of economic complexity. ESI Working Paper 21-11. https://digitalcommons.chapman.edu/esi_working_papers/348/
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.