Indicators of Product Sophistication and Factor Intensities: Measurement Matters

The widely used PRODY indicator by Hausmann, Hwang and Rodrik (2007) [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, Hwang and Rodrik (2007) 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.