3. The following are production possibilities tables for South Korea and the United States. Assume that before specialization and trade the optimal product mix for South Korea is alternative B and for the United States is alternative U.

LO2

a. Are comparative-cost conditions such that the two areas should specialize? If so, which product should each produce?

b. What is the total gain in LCD displays and chemical output that would result from such specialization?

c. What are the limits of the terms of trade? Suppose actual terms of trade are 1 1 _ 2 unit of LCD displays for units of chemicals and that 4 units of LCD displays are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation?

d. Explain why this illustration allows you to conclude that specialization according to comparative advantage results in a more efficient use of world resources.