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Technological Change, Trade, and Endogenous Factor Endowments

  • Erich Gundlach
  • Albert de Vaal

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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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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  1. Alan V. Deardorff, 1974. "A Geometry of Growth and Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 7(2), pages 295-306, May.
  2. anonymous, 1995. "Does the bouncing ball lead to economic growth?," Regional Update, Federal Reserve Bank of Atlanta, issue Jul, pages 1-2, 4-6.
  3. Xu, Bin, 2001. "Factor bias, sector bias, and the effects of technical progress on relative factor prices," Journal of International Economics, Elsevier, vol. 54(1), pages 5-25, June.
  4. Erich Gundlach, 2007. "The Solow model in the empirics of growth and trade," Oxford Review of Economic Policy, Oxford University Press, vol. 23(1), pages 25-44, Spring.
  5. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  6. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
  7. Findlay, Ronald & Jones, Ronald, 2000. "Factor bias and technical progress," Economics Letters, Elsevier, vol. 68(3), pages 303-308, September.
  8. Krugman, Paul R., 2000. "Technology, trade and factor prices," Journal of International Economics, Elsevier, vol. 50(1), pages 51-71, February.
  9. Daniel Becker & Erich Gundlach, 2007. "Factor Price Equality and Biased Technical Change in a Two-Cone Trade Model," Review of Development Economics, Wiley Blackwell, vol. 11(4), pages 685-698, November.
  10. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
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