Measuring the world economy

This paper provides an empirical assessment of whether the world economy has become smaller in terms of economic distance over the last decades. We adopt a cross-sectional spatial econometric approach, relating domestic output volatility to (distance-weighted averages of) other countries' output volatility, using a sample of 135 countries and rolling 10-year time windows over the period 1955 to 2006. Using descriptive measures, test statistics, and spatial econometric estimates, we find that cross-country interdependence was virtually insignificant in the early post-war period but has increased strongly from the mid-1960s to the mid-1980s and remained at a high level since then. Results for the most recent period suggest that common shocks to output volatility have a magnified impact and roughly quadruplicate through international spillover effects, which are transmitted through both trade and financial openness.