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The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations
Author(s) -
Loungani Prakash,
Mody Ashoka,
Razin Assaf
Publication year - 2002
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00246
Subject(s) - gravity model of trade , economics , surprise , asset (computer security) , scale (ratio) , econometrics , economies of scale , transactional leadership , macroeconomics , microeconomics , computer science , geography , psychology , social psychology , computer security , management , cartography
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.