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Technological change, trade, and endogenous factor endowments

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  • Gundlach, Erich
  • de Vaal, Albert

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.

Suggested Citation

  • Gundlach, Erich & de Vaal, Albert, 2008. "Technological change, trade, and endogenous factor endowments," Kiel Working Papers 1471, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1471
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    References listed on IDEAS

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    More about this item

    Keywords

    Deardorff diagram; technology shock; factor endowments; factor bias; sector bias;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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