Indicators of product sophistication and factor intensities: Measurement matters

Abstract

The widely used PRODY indicator by Hausmann et al. [ 1 ] [What you Export Matters; Journal of Economic Growth: 12, 1–25] allows the calculation of product sophistication and factor intensities at high levels of disaggregation. In this paper I deal with its measurement, its conceptional limitations, its sensitivity to subjective decision making, its alternatives, and how to reap the best possible benefit from its usage. I introduce a theory-based alternative and investigate the sensitivity of empirical results with respect to different measurements. In particular, I re-estimate the main results of Hausmann et al. [ 1 ] with 75 variants of measurement. Small changes to the sample, the aggregation level, or the construction of the indicator can make a difference. Moreover, I offer two STATA programs that ease the calculation of various PRODY variants.