The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is P W . Assume that all cotton towels are identical.
FIGURE 34- 3
-If wages in Mexico are lower than those in Canada,

Question

The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is P W . Assume that all cotton towels are identical.
  FIGURE 34- 3
-If wages in Mexico are lower than those in Canada,

Quizplus · Accepted Answer

If wages in Mexico are lower than those in Canada, then Mexican producers are able to offer cotton towels at a lower price than Canadian producers. As a result, Canadian consumers can benefit by purchasing some low-cost cotton towels from Mexico. This will shift the domestic demand curve to the left, reducing the quantity of cotton towels demanded domestically, and reducing the price that Canadian producers can charge. This may also lead to specialization and greater efficiency in the production of other goods and services in Canada, where it has a comparative advantage. However, this does not mean that Mexico has a comparative or absolute advantage in all products, nor does it suggest that Canadian living standards can be raised by imposing tariffs on imports from Mexico.

The Diagram Below Shows the Domestic Demand and Supply Curves