A NOTE ON SHORT-TERM INTERSECTORAL FACTOR IMMOBILITY

The dynamic trade literature has identified two important aspects of t he adjustment process to real shocks contributed to short-term interse ctoral factor immobilities. Real income rises over time as the product ion factors reallocate, while the presence of nontradeable goods leads to a dynamic relative price effect. While these effects are usually s tudied separately in the literature, this paper presents a simple mult i-period model with optimizing agents in which both effects operate si multaneously. As an illustration of the model, the current account res ponse to a favorable endowment shock is studied. The two effects have an opposite impact on the direction of the current account response. T he relationship between model parameters and the response to the shock is studied.