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. Required:
a. Draw the production possibilities frontier for Home with wheat on the horizontal axis and computers on the vertical axis.
b. Explain how the price of wheat relative to computers is determined in the absence of trade.
c. Draw a graph of labor market equilibrium as we did in class with the amount of labor used in wheat, measuring from left to right along the horizontal axis, and the amount of labor used in computers, moving in the reverse direction.