Economic Complexity of Virtual Water Flows

Abstract:

Virtual water quantifies the water embodied in the supply-chain of products and services produced by an economy. A general approach to account for embodied flows is to use an environmentally extended multiregional input-output (E-MRIO) model. In this study, we use an E-MRIO model to estimate domestic exports and virtual water flows between 41 commodities and 115 regions including metropolitan areas within United States. The resulted economic and virtual water flows were used to develop inter-regional spatial networks and bipartite networks between regions and commodities. Economic complexity and product complexity are useful network measures used to characterize a region’s economic development and a product’s significance in the supply-chain, respectively. There are two different approaches used to estimate these metrics, namely Method of Reflections (MR) and Fitness-Complexity Method (FCM). Our objective is to develop a new metric to evaluate a region’s or a product’s importance in the supply-chain in terms of the amount of embodied water in order to inform consumers, businesses and governments about the environmental sustainability of their production and consumption decisions. For this purpose, we use methods for the estimation of economic complexity and product complexity indices and apply them to virtual water flows. These new metrics are named as Virtual Water Complexity of Regions (VWCR) and Virtual Water Complexity of Products (VWCP). To estimate the VWCR and VWCP metrics, both MR and FCM approaches are used and the results are compared against economic complexity. We find that the virtual water complexity metrics estimated by FCM approach are statistically related to economic/product complexity indices, indicating that the VWCR and VWCP indices could be used to inform the sustainability of water-use decisions across spatial scales and economic sectors. Further applications of the metrics are needed to demonstrate their utility for various users.