Specific Factors Model

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 labour is free to move between the two industries. When Canada and Mexico engage in free trade, the relative price of televisions falls in Canada and the relative price of timber falls in Mexico.

(a) In a graph similar to the one described in class, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. (i) How does the change in the wage compare to the price change for televisions? (ii) What is the change in real wage income for each good?

(iii) Are workers in Canada better or worse off? Remember to label your graph!

(b) Whatistheimpactofopeningtradeontherentalratesoncapital(rkC)and land(rhC)in Canada? Give a rationale for your answer.

(c) What is the impact of opening trade on the rentals on capital (rkM) and land (rhM) in Mexico? Give a rationale for your answer.

(d) In each country, has the specific factor in the export industry gained or lost and has the specific factor in the import industry gained or lost?