The global disconnect: The role of transactional distance and scale economies in gravity equations

Prakash Loungani, Ashoka Mody, Assaf Razin

Research output: Contribution to journalArticlepeer-review

88 Scopus citations

Abstract

Recent empirical analyses show that asset flows can be modelled by the same 'gravity' equations that trade economists have used so successfully for the past few decades. This is something of a surprise. Trade economists do not yet have a unified theory of why gravity models should work-and the situation is worse for asset flows. Reasonable theories would predict that greater distance between countries should generate more asset flows rather than less as the econometric results seem to consistently show. In this paper we discuss how host and source country GDPs, language, and distance the core explanatory variables in the traditional gravity models-fare in trade and asset flows estimations. While the 'distance puzzle' is not resolved, it is considerably reduced by going beyond consideration of physical distance to concepts of transactional distance and scale economies.

Original languageEnglish (US)
Pages (from-to)526-543
Number of pages18
JournalScottish Journal of Political Economy
Volume49
Issue number5
DOIs
StatePublished - 2002
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Sociology and Political Science
  • Economics and Econometrics

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