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.