Working Paper

Technological Change, Trade, and Endogenous Factor Endowments

Authors

  • Erich Gundlach
  • Albert de Vaal
Publication Date

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.

Info

JEL Classification
F11, O41

Key Words

  • Deardorff diagram
  • factor bias
  • factor endowments
  • sector bias
  • technology shock