tion 2. - Specific Factors Model ( 20 marks) Suppose two countries, Canada and the U.S. have the same population and produce two goods: apples and planes. Assume that land (H) is specific to apples, capital (K) is specific to planes, and labour is free to move between the two industries within a country. Denote LA as labour in apple production and LM as labour used in manufacturing of planes. Consumers in each country value apples more than planes. There are currently high tariffs for planes between countries that stops all trade. (a) (4 marks) In a graph with wages on the y-axis and labour allocations in the x-axis, show the autarky equilibrium in Canada and label the initial equilibrium wage, wC and labour employed in each industry, LAC and LMC. What condition must be met in equilibrium for us to determine the optimal allocation of labour LAC and LMC ? (b) (4 marks) Assume the capital to land ratio in Canada is equal to HCKc=41 and the capital to land ratio in the U.S. is equal to HusK45=14. Which country has relatively more capital? In which country is the ratio of autarky prices (PAPM) higher under autarky? Briefly explain why. marks) Both countries remove all tariffs from the plane industry. What is the impact of opening trade on the relative price of plane manufacturing to apple production (PP) in each country?Briefly explain why. (d) (8 marks) Model the impact on Canadian wages from the opening of trade on a graph similar the one you created in part (a). What is the impact of opening trade on consumers real wages PAw), capital owners rental rates on capital (rkC), and land owners rental rate on land (rhC) in Canadi Explain your reasoning. (Hint: Hold the price of apples ( PA) fixed.) tion 2. - Specific Factors Model ( 20 marks) Suppose two countries, Canada and the U.S. have the same population and produce two goods: apples and planes. Assume that land (H) is specific to apples, capital (K) is specific to planes, and labour is free to move between the two industries within a country. Denote LA as labour in apple production and LM as labour used in manufacturing of planes. Consumers in each country value apples more than planes. There are currently high tariffs for planes between countries that stops all trade. (a) (4 marks) In a graph with wages on the y-axis and labour allocations in the x-axis, show the autarky equilibrium in Canada and label the initial equilibrium wage, wC and labour employed in each industry, LAC and LMC. What condition must be met in equilibrium for us to determine the optimal allocation of labour LAC and LMC ? (b) (4 marks) Assume the capital to land ratio in Canada is equal to HCKc=41 and the capital to land ratio in the U.S. is equal to HusK45=14. Which country has relatively more capital? In which country is the ratio of autarky prices (PAPM) higher under autarky? Briefly explain why. marks) Both countries remove all tariffs from the plane industry. What is the impact of opening trade on the relative price of plane manufacturing to apple production (PP) in each country?Briefly explain why. (d) (8 marks) Model the impact on Canadian wages from the opening of trade on a graph similar the one you created in part (a). What is the impact of opening trade on consumers real wages PAw), capital owners rental rates on capital (rkC), and land owners rental rate on land (rhC) in Canadi Explain your reasoning. (Hint: Hold the price of apples ( PA) fixed.)
