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PECIFIC FACTOR MODEL
Canada and Mexico. Suppose that Canada and Mexico produce two goods: timber and televisions. Assume that land is specific to timber, 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 television falls in Canada and the relative price of timber falls in Mexico.
A) Considering these changes in relative prices, what product does Canada export? What product does Mexico export?
B) In a graph representing the equilibrium of the labor market in Canada, show how the wage changes due to the fall in the price of television, while holding constant the price of timber. How does the nominal wage change in Canada? How does the real wage in terms of both goods change?
C) What is the impact of opening trade on the rentals on capital and land in Canada? Can we predict the change in the real rentals on capitals and lands? And in Mexico?
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?
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