The Product Space

The Product Space is a network that formalizes the idea of relatedness between products traded in the global economy. The network first appeared in the July 2007 issue of Science in the article "The Product Space Conditions the Development of Nations," written by Cesar A. Hidalgo, Bailey Klinger, Ricardo Hausmann, and Albert-László Barabási. The Product Space network has considerable implications for economic policy, as its structure helps elucidate why some countries undergo steady economic growth while others become stagnant and are unable to develop. The concept has been further developed and extended by The Observatory of Economic Complexity, through visualizations such as the Product Exports Treemaps and new indexes such as the Economic Complexity Index (ECI), which have been condensed into the Atlas of Economic Complexity. From the new analytic tools developed, Hausmann, Hidalgo and their team have been able to elaborate predictions of future economic growth.

Conventional economic development theory has been unable to decipher the role of various product types in a country's economic performance. Traditional ideals suggest that industrialization causes a “spillover” effect to new products, fostering subsequent growth. This idea, however, had not been incorporated in any formal economic models. The two prevailing approaches explaining a country’s economy focus on (a) the country’s relative proportion of capital and other productive factors or (b) differences in technological capabilities and what underlies them. These theories fail to capture inherent commonalities among products, which undoubtedly contribute to a country’s pattern of growth. The Product Space presents a novel approach to this problem, formalizing the intuitive idea that a country which exports bananas is more likely to next export mangoes than it is to export jet engines, for example.

The idea of the Product Space can be conceptualized in the following manner: consider a product to be a tree, and the collection of all products to be a forest. A country consists of a set of firms—in this analogy, monkeys—which exploit products, or here, live in the trees. For the monkeys, the process of growth means moving from a poorer part of the forest, where the trees bear little fruit, to a better part of the forest. To do this, the monkeys must jump distances; that is, redeploy (physical, human, and institutional) capital to make new products. Traditional economic theory disregards the structure of the forest, assuming that there is always a tree within reach. However, if the forest is not homogeneous, there will be areas of dense tree growth in which the monkeys must exert little effort to reach new trees, and sparse regions in which jumping to a new tree is very difficult. In fact, if some areas are very deserted, monkeys may be unable to move through the forest at all. Therefore, the structure of the forest and a monkey’s location within it dictates the monkey’s capacity for growth; in terms of economy, the topology of this “product space” impacts a country’s ability to begin producing new goods.

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