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3610 PS2 - Cornell University Fall 2009 Economics 3610...

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Cornell University Fall 2009 Economics 3610: Problem Set 2 Due September 25, 2009 1. Specific Factors (Question 9 of Chapter 3 of Text) 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 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 timber falls in Mexico. a. In a graph similar to Figure 3-6, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. Can we predict the change in the real wage? b. 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 capital and land? c. What is the impact of opening trade on the rentals on capital and land in Mexico? Can we predict the change in the real rentals on capital and land?
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