Measuring economic complexity of countries and products: which metric to use?

TL;DR

This paper compares two metrics, Fitness-Complexity and the Method of Reflections, for evaluating economic complexity of countries and products, finding that Fitness-Complexity generally provides more accurate rankings based on trade data.

Contribution

It introduces a quantitative comparison of the Fitness-Complexity and Method of Reflections metrics using trade data, and proposes a generalized version of Fitness-Complexity for improved rankings.

Findings

Fitness-Complexity outperforms the Method of Reflections in ranking accuracy.

The generalized Fitness-Complexity can yield better results with reliable data.

Empirical evaluation using international trade data supports the superiority of Fitness-Complexity.

Abstract

Evaluating the economies of countries and their relations with products in the global market is a central problem in economics, with far-reaching implications to our theoretical understanding of the international trade as well as to practical applications, such as policy making and financial investment planning. The recent Economic Complexity approach aims to quantify the competitiveness of countries and the quality of the exported products based on the empirical observation that the most competitive countries have diversified exports, whereas developing countries only export few low quality products -- typically those exported by many other countries. Two different metrics, Fitness-Complexity and the Method of Reflections, have been proposed to measure country and product score in the Economic Complexity framework. We use international trade data and a recent ranking evaluation measure to quantitatively compare the ability of the two metrics to rank countries and products according to their importance in the network. The results show that the Fitness-Complexity metric outperforms the Method of Reflections in both the ranking of products and the ranking of countries. We also investigate a Generalization of the Fitness-Complexity metric and show that it can produce improved rankings provided that the input data are reliable.