A NOTE ON SHORT-TERM INTERSECTORAL FACTOR IMMOBILITY

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