HO model: Canada and Mexico are two countries. Two goods are produced, corn and syrup, with syrup being capital-intensive (and corn being labour-intensive). Canada is relatively abundant in capital. Do the question in terms of corn.

a) Draw the RS-RD diagram, showing Canada and Mexico's RS curves, the RD curve, as well as each country's pre-trade relative prices of corn as well as the post-trade world relative price of corn. Use the diagram to describe what happens to the relative price of corn in Canada when it opens to trade with Mexico.

b) Drawing diagrams that we used in our lectures, describe what happens in Canada when it opens up to trade to the following things: L/K in each sector, w/r, output for each good, real incomes of both factors.

c) Draw the gains from trade for Mexico using a PPF diagram.

d) Suppose that Canada and Mexico are open to trade with each other. Suddenly, Canada receives more capital. Drawing relevant diagrams to clearly illustrate all changes, show what happens in Canada to: relative price of corn, w/r, L/K in each sector, output in each sector. Do NOT assume that output prices stay the same.