A Combinatorial Model of Economic Development
Alje van Dam & Koen Frenken
The relation between variety of economic activities in a country and its economic development has been well studied, showing that increased variety goes hand in hand with an increased level of economic development. However, there remains a large variation in the level of development of highly diversified countries. Furthermore, some of the richest countries tend to become more specialized recently. We introduce a minimal model of economic development of countries based on the 'theory of capabilities' in the economic complexity literature, where countries develop by acquiring new capabilities and recombining capabilities into new products. This leads to a process of diversification where countries develop new export products related to existing ones. We then attempt to explain the relationship between GDP per capita and the number of export products, which both depend on the number of capabilities in a country. We show also show some first empirical results that support the model results.