Canada and U.S. trade two products with each other - Cars (C) and Textile (T). Denote all US variables with *. Each product is produced using labour only but there are two types of workers in each industry: low- skilled workers (L) and high-skilled ones (H). Low-skilled workers can easily change occupation and move from one industry to another if they can earn more there. Skilled workers, however, cannot change occupation because their skills are specific to the industry in which they work. Denote with L low-skilled labor, so that Lo and LT are employment of low-skilled workers in auto and textile industries and Lc+LT = L is the full employment condition for unskilled labor, with I being the total number of unskilled workers. For skilled labor, employment levels are given exogenosuly by Hc and HT. Production technologies in the two industries are the same in both coun- tries and are given by the following production functions: Yo LCH YT LT + HT where Yo and Yr are output levels. Consumers in both countries have the same preferences given by utility function U = CACT where Cc and CT are consumption levels of the two goods. Also suppose that Canada has more skilled workers in auto industry but less in textiles than US: Hc> Hc; HT
