Despite the widespread movement of world trade towards more diversification, there are numerous countries specialized in a relatively small number of exported goods. Figure 1 shows that the average country exports only half the number of total export goods reported in the SITC Rev. 1 classification. Figure 2 presents a more striking pattern—close to 50 percent of the global sample exports less than 30 percent of goods in the SITC Rev. 1 classification. This is consistent with Hanson (2012) and Hanson, Lind, and Muendler (2014) who argue that there is a tendency for countries to “ _hyper-specialize_ .” These global trends notwithstanding, there are important differences across indicators of trade concentration. First, imports are more diversified than exports, regardless of the indicator of concentration being used. That is, countries tend to import more goods than they export, and the steady decline observed in traditional measures of import concentration over the last four decades are less pronounced that those observed for exports. For this reason, and to avoid repetition, the rest of the paper will focus on export diversification only.<sup>9</sup> Second, diversification measured by the HHI of export values is much noisier than diversification measured by the number of products exported, as shown in Figure 1. The differences in trends and variability between the HHI and the number of products exported come from three elements affecting trade flows: the number of products exported; the volumes exported; and the relative prices of these goods. In particular, the extensive margin of exports (the number of products exported) is affected by the first of these three elements while the HHI is affected by all three elements. This explains why concentration, as measured by the HHI, increases in the years prior to the global financial crisis (a period of sharp increases in commodity prices) yet falls when measured by the number of products exported.

Which measure of diversification is a better proxy for a country’s ability to buffer shocks to relative prices: the HHI or the number of products? This paper argues that, from an economic point of view, the latter is a better proxy because a country’s ability to cope with external shocks is closely related to its ability to

> 9 Recent papers on trade diversification and its implications also focus on export diversification only. For example, Klinger and Lederman (2006) study the relation between the HHI of export values and GDP per capita. Similarly, Cadot, Carrère, and Strauss-Kahn (2011) construct three measures of export concentration—the HHI, the Theil entropy index, and the Gini coefficient—and study how they relate to GDP per capita. Hummels and Klenow (2005) study the relationship between the extensive margin of exports, one of our measures of export concentration, and GDP and population. Finally, Bacchetta et al. (2007) and Agosin, Alvarez, and Ortega-Bravo (2012) study the determinants of several measures of export concentration. This does not, however, imply that the potential welfare implications of import diversification should be overlooked (see Cadot, Carrère, and Strauss-Kahn (2009) for a review of the literature on import diversification and its benefits). Rather, from an empirical point of view, concentration is more acute in exports than imports.

9