Trade in Capital Goods

Innovative activity is highly concentrated in a handful of advanced countries. These same countries are also the major exporters of capital goods to the rest of the world. We develop a model of trade in capital goods to assess its role spreading the benefits of technological advances. Applying the model to data on production and bilateral trade in capital equipment, we estimate the barriers to trade in equipment. These estimates imply substantial differences in equipment prices across countries. We attribute about 25 percent of cross-country productivity differences to variation in the relative price of equipment, about half of which we ascribe to barriers to trade in equipment.