Abstract

This paper constructs the first global dataset on inter-sectoral capital service flows. Capital assets are used in different relative proportions across sectors and countries. I use a dynamic general equilibrium model to quantify the importance of disaggregated capital in global production. Output prices in every country are sensitive to foreign shocks through a feedback loop between the cost of capital services and the cost of intermediate inputs. The per-period gains from trade in steady state are 8 to 36 percent higher than existing dynamic models and more than double that in static models. This amplification effect is higher in more capital-intensive countries. Under trade liberalization, output in each country reallocates towards sectors with the largest respective declines in capital service costs, disproportionately raising capital incomes. This mechanism in my model explains six percent of changes in sectoral market shares between 1997 and 2007.