Tuesday, 3 October 2017

Trade and the Atlas of Economic Complexity

Last week in ECON100 we covered the gains from trade. The simple model we employ is essentially a model based on Ricardian trade, which assumes that each country specialises in producing (and exporting) goods that they have comparative advantage in producing (goods that they can produce at a lower opportunity cost), and imports goods that they have comparative disadvantage in producing (goods that they produce at a high opportunity cost). However, the real world is significantly more nuanced than this simple model, as Noah Smith noted recently:
Most academic models of international trade are pretty simplistic. Some of these models are surprisingly effective for making certain types of predictions -- for example, economists are very good at predicting how much different countries will trade with each other. But they’re not so good at predicting what kind of things the countries will specialize in, which country will have a trade deficit or surplus, how trade will affect growth, or which workers and businesses will benefit from trade...
Now, a number of economists are working on new empirical approaches that take into account the huge variety and complicated connections between the products and services that get traded across international borders.
Two such economists are Ricardo Hausmann of Harvard’s Kennedy School and Cesar Hidalgo of Massachusetts Institute of Technology. They and their research team have a theory that the more different products a country makes, the better positioned it is to grow. This idea runs counter to the conventional wisdom -- and the predictions of many standard models -- that different countries hyperspecialize in only a few goods and services. According to Hausmann and Hidalgo, countries are better off when they can make a multitude of things. Countries such as Saudi Arabia that rely on a single product will perform worse, all else equal, than countries such as Japan that can make almost anything they want.
The economists claim that their so-called economic complexity index is much better at predicting long-term economic growth than other forecasting methods based on things like the level of regulation or the amount of investment in education. They recently put out a report predicting that China’s growth will slow over the next decade, while India’s will remain rapid.
Hausmann and Hidalgo's Atlas of Economic Complexity is well worth looking at. There is a wealth of trade data, and excellent visualisations (if you click on 'Visualizations' in the top bar). For instance, here's New Zealand's exports by category for 2015 (it's much easier to see at the website):

I was surprised that raw aluminium was as much as 1.7% of exports. And here's a similar visualisation of export destinations (again for New Zealand in 2015; here's the direct link):

No surprises about China, Australia, the United States and Japan being the biggest export destinations, but Algeria (1.2%) and Egypt (1.0%) were a bit surprising to me. Anyway, there's lots more to explore on the site, and lots of surprises (try playing the 'which country is the biggest exporter of *some random product*?' game with your family or friends). Minutes of fun, guaranteed. Enjoy!

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