Suppose two countries, Canada and Mexico, produce two goods: lumber and televisions. Assume that land is specific to lumber, capital is specific to televisions, and labor 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 lumber falls in Mexico. a. Using a graph similar to Figure 3-5, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of lumber. Can we predict that change in the real wage? (Draw a graph and explain your answer in words)

b. What is the impact of opening trade on the rentals on capital and land in Canada? Can we predict that change in the real rentals on capital and land? (Explain in words)

Figure 3-5 is below: