_EXPY_ we will use what we call _dynamic PRODY_ s, i.e. the _PRODY_ values of a certain service export may vary year to year. Hence, an increase i _n dynamic EXPY_ can be due to (i) an increase in the _PRODY_ of a service and/or (ii) an increase in the share of high _PRODY_ products in the export basket. This is important for two reasons. First, it gives us an opportunity to capture the effect of changes in PRODY on EXPY. We do not only want to measure the fact that countries are getting more and more engaged in higher value service export, but also that the service exports themselves are increasing in sophistication due to improvements in ICT and 3T‘s. In fact many richer and high-skilled countries are engaged in service exports boosting the _PRODY_ s of some service export categories.<sup>9</sup> Secondly, since the data is much less disaggregated for services, using _static PRODY_ fails to capture the movements to higher _PRODY_ service exports that are only sub-categories of the broader categories captured by the Balance of Payments data.

A second characteristic, and just mentioned, is that service export data is not collected in the same detailed manner as goods export data. This means we will end up with only ten broad categories of service exports. They are different enough to make the analysis interesting, but it of course limits the extent to which we can understand the mechanisms in play. For example, if a country – within the same service export category - move from a sub-category of services with presumed low _PRODY_ , to a sub-category of services with presumed high _PRODY_ that would not show up at all in the _static EXPY_ . As mentioned, the _dynamic EXPY_ would however capture this as it allows for the _PRODY_ s to change over time. Unfortunately though, even when comparing the _static EXPY_ and the _dynamic EXPY_ , due to the high aggregation of data it would be impossible to know if the increase in the _dynamic EXPY_ was created by a higher share of high _PRODY_ services in the basket or an increase in the _PRODY_ s themselves as the _static EXPY_ fails to capture changes in the subcategories of the export basket.

Table A3 shows that not only the mean _service EXPY_ has increased over the years but also the standard deviation of _service EXPY_ , i.e. countries are becoming increasingly diverse in their value of _service EXPY_ , This indicates that the potential _service EXPY_ , proxy for the ―potential service production frontier‖, has increased and some countries have started to benefit from this higher potential.

The _PRODY_ s for each service category over time is presented in Table 2. The left column present the traditional services (transportation, travel, communication and construction), while the right column present the modern services (insurance, financial, computer & information, royalties & license fees, other business services, and personal, cultural & recreational services). In general, the _PRODY_ of the modern services are higher and their growth has been stronger, despite the higher initial levels. Our focus herein is on commercial service exports; therefore we do not include government services in our sample of measurement of _Service EXPY_ (see Annex for a more details description of what is measured within each category).

Finally we would like to highlight limitations to the interpretation of service exports and _Service EXPY_ due to the way data is registered. First, the level of aggregation due to broad categories already mentioned is sometimes exacerbated by the further aggregation in what the countries

> 9 One potential problem with the _dynamic PRODY_ is that as developing countries starts getting engaged in the high _PRODY_ services, the _PRODY_ s themselves decreases due to the lower income of developing countries. However, at this point, the share of service exports of high _PRODY_ value from developing countries is still too small to have an overall impact. The impact of a high _PRODY_ service in the export basket of a small country can be significant for that country‘s _EXPY_ , but the high _PRODY_ export from that small country will not have an impact on the overall _PRODY_ of that service, in the same sense that a small firm is a price taker in a large market.

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