From Ideas to Trade

This paper studies the effects of technological innovation on bilateral trade developing and testing a Ricardian model that builds on Eaton and Kortum (2002) and allows for heterogenous technological dispersions across countries. Higher technological dispersion increases the force of comparative advantage. Our model predicts that both changes in costs and comparative advantage affect bilateral exports, and are interdependent. In particular, a country's exports will benefit from another country's increase in costs the lower the comparative advantage in the latter. In addition, a country's exports will benefit from another country's reduction in comparative advantage the higher the trade costs in the latter. We exploit unique data on historical patents to construct measures of the technological stock and the dispersion parameter to test our model's predictions.