How does the introduction of new goods affect growth? While recent
evidence has highlighted the role of new goods in raising the diversity
and sophistication of a country’s production structure, which in turn
matter for growth, little evidence tells us why. I propose a simple
channel of impact relying on two building blocks. One, there is a
convergence force operating at the product level. The further behind
the frontier you are in a given product, the faster you raise quality.
Two, new goods are introduced with a greater distance to the frontier
than in existing goods. I construct a Schumpeterian growth model with
these features to show how entry into new goods influences aggregate
outcomes by determining the range of products in which convergence
occurs. Detailed trade statistics provide strong support for both
building blocks of the model. Using unit values as a proxy for quality,
I find that unit values exhibit strong convergence – at about 5% a year
– for the great majority of products in the sample. Also the gap in
unit values relative to the world frontier is larger for new goods.
Confirming a key prediction of the model, I further show that, holding
constant levels of development, unit values are inversely related to
measures of diversification and sophistication of a country’s exports.
This last finding helps to explain a recently documented puzzle
regarding the high sophistication and low unit values of Chinese
exports. (To be posted in early November)
Perhaps I will not be convinced (what goods can be produced reflects an unobserved heterogeneity in underlying conditions), but Hwang is worth watching.