INTERNATIONAL TRADE INDICATORS

Definition:

The Geographic Hirschman Index (GHI) measures the geographic concentration or diversification of a country’s exports or economic activities across different regions. It is used to assess how dependent a country is on a few geographic markets or if its activities are well spread across many regions.

Significance:

• Trade Risk Management: A higher geographic concentration (higher GHI) indicates a reliance on fewer markets, which can increase vulnerability to shocks like changes in trade policies, economic downturns, or political instability in key export destinations.
• Economic Resilience: A more diversified geographic distribution (lower GHI) improves a country’s resilience by reducing the impact of disruptions in specific markets.
• Policy Insight: Policymakers can use the GHI to identify when export diversification strategies are needed.
• Firm-Level Strategy: Companies can use the GHI to evaluate their reliance on certain markets and adjust strategies accordingly to reduce risks.

Formula:

The Geographic Hirschman Index is calculated by taking the square root of the sum of the squared shares of exports to each country or region. 

Interpretation:

• Higher GHI: A higher index indicates that a country’s exports are concentrated in fewer countries or regions, meaning less diversification and higher dependence on specific markets.
• Lower GHI: A lower index suggests that exports are spread more evenly across many countries or regions, indicating greater geographic diversification.
• The index typically ranges between 0 (perfect diversification) and 1 (complete concentration in one country).

Range:

• 0 (Perfect Diversification): If exports are evenly distributed across all markets, the GHI approaches zero, indicating maximum diversification.
• 1 (Complete Concentration): If all exports go to a single country, the GHI equals 1, representing complete concentration.

Limitations:

• Ignores Economic Size of Markets: The GHI does not account for the relative importance of the countries being traded with. A country may export heavily to a few stable markets, but GHI could indicate high risk due to concentration.
• Static Measure: The GHI is often calculated at a specific point in time and may not reflect shifts in geographic trade over time.
• No Differentiation of Market Risk: GHI treats all markets equally, without considering the varying risk levels of different countries. Two countries with the same GHI might have very different risk exposures depending on their political or economic stability.
• Limited by Data Granularity: If data on trade flows are aggregated at a regional level, the GHI might underestimate or overestimate the actual geographic concentration.