3. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade, the optimal product mix for China is alternative B and for the United States is alternative U. LO40.2

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

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

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

Product China Production Possibilities A B C D E F Apparel (in thousands)

Chemicals (in tons)

30 0

24 6

18 12 12 18 6

24 0

30 Product U.S. Production Possibilities R S T U V W Apparel (in thousands)

Chemicals (in tons)

10 0

8 4

6 8

4 12 2

16 0

20