Technological Change, Trade, and Endogenous Factor Endowments

• Abstract

  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.

• Keywords

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

• JEL classification

  F11, O41

• Download

  KWP 1471