METHODOLOGICAL APPROACHES TO ASSESSING THE FOREIGN TRADE DIVERSIFICATION
Abstract
The article looks into the essence, construction, advantages and disadvantages of key indicators used to assess the level of foreign trade diversification – the Herfindahl-Hirschman concentration index, the Theil entropy index and the Gini index. Based on the comparative analysis, the suitability of these indicators for assessing dynamic changes in trade structure and conducting international comparisons of trade diversification level is determined. A method for estimating extensive and intensive margins of diversification by decomposing the Theil index into between-groups and within-groups components is presented. The article points out that diversification at the extensive margin occurs when the number of active lines in export rises, when diversification at the intensive margin occurs when the distribution of trade values across existing export lines becomes more even. The concept of the U-curve, which describes the correlation between the level of export diversification and economic development of the country, is outlined. According to this U-shaped pattern, economies grow through two stages of diversification: at first, sectoral diversification increases, but there exists a level of per capita income beyond which the sectoral distribution of export starts concentrating again; extensive margin accounts for most of this evolution. The limitations in the accuracy of estimating diversification shifts caused by shortcomings in modern systems of classification of goods and services in international trade are described. These shortcomings come from uneven disaggregation of product groups, because of which trade data include a large number of economically irrelevant observations, while important categories in machinery, vehicles, computer equipment, and other high-tech industries are lumped together in bulky lines. The author argues that Theil index is more accurate and profound tool for export diversification analyses, though Herfindahl-Hirschman and Gini indices can be used as an auxiliary tool to deepen understanding of structural changes in international trade.
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