What are things made out of?: The role of knowledge in international trade.

Christian LarsenV577

3/4/14

International Trade Theory ReviewRicardian Model (Comparative Advantage)

One factor of Production (labor) in determining product creation.

Heckscher-Ohlin Model Multiple factors of Production (Labor, Capital, Land) in determining

product creation.

The Atlas of Economic Complexity Measures the prosperity of a country by the amount of product

diversification and product ubiquity within its economy. Diversity: How many different kinds of products a country is able to make. Ubiquity: Number of countries able to make the same product(s).

What drives an economy is the knowledge needed to manage a diversified economy through products differentiation.

OverviewDefine knowledge and its importance to product diversification and ubiquity.

Explain how we measure economic complexity.

Importance of this measure in terms of growth and trade.

Knowledge The diversity and ubiquity of products a country can produce derives

from the combined knowledge or societal “know how” embedded in a society.

Two types: Tacit - knowledge not easily transferred to a person. Explicit - knowledge easily transferred to a person.

People do not hold enough individual knowledge to create a product. They lack the tacit knowledge, and this tacit knowledge deficit is what constrains growth and prosperity.

Similarly, products require more knowledge embedded in a society than a singular person can offer.

The key to making products then is to combine such knowledge and use this societal “know how” through webs of interactions (groups, firms, organizations).

Measuring Economic Complexity Two Measures:

Diversity Ubiquity - how ubiquitious a product is reveals the volume of knowledge

that is required for its production. Complex products are less ubiquitious and simple products are more

ubiquitious. We measure these two concepts using the Economic Complexity Index (ECI).

We measure the combination of diversity and ubiquity within a country. Crude estimates: Both variables are used to correct the information of the

other variable multiple times through regression. Ultimately, the economic complexity of a country is acutely tied to the

diversity and ubiquity of the products it produces: to increase score, countries need to become more competitive in complex industries.

Highest Ranked Products

Importance of Economic Complexity Economic complexity matters because it illustrates the disparity in levels of income per

country and predicts future growth. ECI measure can be used to predict future growth. There is a strong relationship between the level of economic complexity and income per capita

that countries are able to create. The measure of embedded knowledge or capabilities in society is predictive of

growth and prosperity. The ability of economic complexity to predict future growth puts forward that

countries tend to converge toward an income level that is harmonious with their overall level of embedded knowledge.

Economic complexity relates to the prosperity and wealth of a country. Economic complexity is viewed as a driver of prosperity. Countries which have a higher value of economic complexity, but a lower level of

income per capita, tend to grow faster than those rich countries with a higher level of prosperity (i.e., convergence).

Countries need to shift or move towards activities that require more complex and technical intensive activities.

Income per capita and ECI

References Country Rankings (2008). The Atlas of Economic Complexity. Retrieved

from http://atlas.cid.harvard.edu/rankings/country/

Hausmann, R., Hidalgo, C., Bustos, S., Coscia, M., Chung, S., Jimenez, J., ... & Yildirim, M. (2011). The Atlas of Economic Complexity: Mapping Paths to Prosperity. Boston. USA. Retrieved from http://www.chidalgo.com/Atlas/HarvardMIT_AtlasOfEconomicComplexity_Part_I.pdf

Hausmann, R., & Hidalgo, C.A. (2010). Country Diversification, Product Ubiquity, and Economic Divergence. HKS Faculty Research Working Paper Series RWP10-045, John F. Kennedy School of Government, Harvard University. Retrieved from http://dash.harvard.edu/bitstream/handle/1/4554740/RWP10-045_Hausmann_Hidalgo.pdf?sequence=1

H.G. (2011, Oct 27th). The building blocks of economic growth: Complexity matters. [Web log comment]. Retrieved from http://www.economist.com/blogs/freeexchange/2011/10/building-blocks-economic-growth