Consider a very simple representation of the before-trade Canadian and U.S. economies. Both countries produce only automobiles and food, according to the technology represented in the following production possibility frontiers: Assuming the working populations of Canada and the US is 25 and 250 respectively. a. Use well-labelled diagrams, show that Canada can gain from trade with the US. Carefully describe what will happen to Canadian production, employment, and wages after free trade with the US. Be careful to state your assumptions. b. Recognizing that the above model is a simplification of the real world, analyse the likely short- and long-run employment consequences of free trade with the US on Canadian employment and wages. c. Within four years of implementation of the Canada-US Free Trade Agreement (FTA) in 1989, employment in Canadian manufacturing dropped by 400,000. This shows that the FTA killed jobs." True or false? Explain.
