Increasing Export Diversification in Commodity Exporting Countries: A Theoretical Analysis

Drawing on the neoclassical theory of international trade, this study investigates the limits of efficient diversification in low-income commodity exporting countries, and the fundamental importance of relative factor endowments for determining the commodity composition of international trade flows is demonstrated under both certain and uncertain economic conditions. In recognition of the importance of international financial markets for risk spreading and allocating resources efficiently under uncertainty, open economic policies toward international trade in financial assets as well as goods are emphasized.