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A simple measure of economic complexity

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  • Inoua, Sabiou

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.

Suggested Citation

  • Inoua, Sabiou, 2023. "A simple measure of economic complexity," Research Policy, Elsevier, vol. 52(7).
    • Handle: RePEc:eee:respol:v:52:y:2023:i:7:s004873332300077x
    DOI: 10.1016/j.respol.2023.104793
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    References listed on IDEAS

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    Cited by:

    1. Gnangnon, Sèna Kimm, 2023. "The Quality of Aid for Trade Flows and Economic Complexity," EconStor Preprints 271538, ZBW - Leibniz Information Centre for Economics.
    2. Koen Frenken & Frank Neffke & Alje van Dam, 2023. "Capabilities, institutions and regional economic development: a proposed synthesis," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 16(3), pages 405-416.

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