Working Paper

Technological Change, Trade, and Endogenous Factor Endowments

Kiel Working Papers, 1471

Factor endowments are usually taken as given in trade theoretical analyses of technological change.

We use the Deardorff (1974) diagram to show how the steady state capital labor ratio endogenously

adjusts to technology shocks in a two-sector small open economy, an effect which has largely been

neglected in trade theory literature. We show that ignoring the endogeneity of the capital labor ratio

with respect to technology shocks leads to biased predictions of changes in sectoral production and

trade. Imposing stylized facts of growth as restrictions, we assess the relative size of the implied

prediction bias that appears to matter for empirical studies of trade.


Erich Gundlach
Albert de Vaal


Publication Date
JEL Classification
F11, O41