The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations

18 Pages Posted: 21 Feb 2003

See all articles by Prakash Loungani

Prakash Loungani

International Monetary Fund (IMF)

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

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.

Suggested Citation

Loungani, Prakash and Mody, Ashoka and Razin, Assaf, The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations. Scottish Journal of Political Economy, Vol. 49, pp. 526-543, 2002. Available at SSRN: https://ssrn.com/abstract=343197

Prakash Loungani (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

Ashoka Mody

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-9617 (Phone)
202-589-9617 (Fax)

HOME PAGE: http://www.amody.com

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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