Capabilities, Wealth and the Export-Mix

This paper re-explores the relation between a country’s level of wealth and the mix of products it exports. It shows how a country’s capabilities i.e., its productivity and quality levels in each good, simultaneously determines both the mix of goods it produces and exports, and its level of gdp per capita. In our multi-product general equilibrium setting, the relation between a country’s quality level in an industry and its level of capability and wealth (gdp per capita) is non-monotonic. It is this nonmonotonicity that generates a relation between capabilities, wealth and the product mix. We show that directly the presence of this non-monotonicity in the empirical data. We examine per capita gdp growth and changes in the product mix by country over a 25-year period. For the poorest third of countries, changes in the product mix substantially over-predict per capita gdp growth. Preliminary and incomplete. Please do not cite or circulate.