  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.
