STEG Working Paper

Uneven Product Diversification: Explaining the Lag of Agricultural Economies

Guzmán Ourens

This paper documents that product diversification is on average lower in the agricultural sector than in manufacturing activities. A simple model shows how this regularity can yield income divergence enhanced by terms of trade deterioration, a pattern that characterizes development of agricultural economies in the data. The model explains these facts without the need of heterogeneous consumers or products. Key parameter values are estimated and used in an exercise showing that the mechanism proposed is quantitatively important.