A Simple Measure of Economic Complexity

Sabiou Inoua ()
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Sabiou Inoua: Economic Science Institute, Chapman University

Working Papers from Chapman University, Economic Science Institute

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.

Keywords: economic growth; economic development; economic complexity; product diversity; innovation; capabilities; technology (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:21-11

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