Beyond exact match: A product-space measure of trade similarity

A broad class of trade-overlap measures---the similarity indices of Michaely, Aquino, Finger--Kreinin and Linnemann--van Beers, and the Grubel--Lloyd index---are the same transform [[EQUATION]] of a Jaccard coefficient, taken of trade shares or of values. Their minimum-over-matched-categories core makes them blind to cross-category relatedness and sensitive to product aggregation; cosine similarity shares the latter defect. We propose a product-space cosine index of trade proximity,[[EQUATION]], with [[EQUATION]] encoding product relatedness. It credits related cross-category overlap and is five to seven times more stable across 2-, 4- and 6-digit classifications, extending to capability similarity, structural transformation, and distance to the frontier.