(Specific Factors Model) Canada can produce two goods (TV’s and Lumber) using labour which is mobile between the two sectors. In addition, capital is specific to producing TV’s and land is specific to producing Lumber. (
a) Draw a PPF for Canada. Put TV’s on the horizontal axis and Lumber on the vertical axis.
(b) What is the slope of the PPF equal to? Briefly explain why the PPF in the specific factor’s model is different from that in the Ricardian model?
(c) Initially Canada is in a position of autarky. Suppose with opening of free trade that the relative price of TV’s (PTV / PL) falls. In your diagram from part (a) show the impact of the relative price change on the production of TV’s and Lumber.