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Technological Change, Trade, and Endogenous Factor Endowments

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  • Erich Gundlach
  • Albert de Vaal

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

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1471.

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Length: 14 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:kie:kieliw:1471

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Keywords: Deardorff diagram; technology shock; factor endowments; factor bias; sector bias;

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