Suppose two countries, Canada and Mexico, produce two goods: timber and televisions
Suppose two countries, Canada and Mexico, produce two goods: timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is freeto move between the two industries. When Canada and Mexico engage in free trade, therelative price of televisions falls in Canada and the relative price of timber falls inMexico.a. Using a ‘Bucket’ diagram like the ones used in class, show how labor in Canada is initially allocated between the timber and television industries. Then, showhow the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. Can we predict that change in real wages?b. What is the impact of opening trade on the rental rates for capital and land in Canada? Can we predict that change in the real rental rates for capital and land?c. What is the impact of opening trade on the rental rates for capital and land in Mexico? Can we predict that change in the real rental rates for capital and land?d. In each country, has the specific factor in the export industry gained or lost? Has the specific factor in the import industry gained or lost?
