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. China Production of Possibilities
Product A B C D E F
Apparel 120,000 96,000 72,000 48,000 24,000 0
Chemicals (in Tons) 0 24 48 72 96 120

U. S. Production of Possibilities
Product R S T U V W
Apparel 40,000 32,000 24,000 16,000 8,000 0
Chemicals (in Tons) 0 16 32 48 64 80

Requried:
a. Are comparative-cost conditions such that the two areas should specialize?
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?

1. The most China will trade (give up) isunit(s) of apparel for 1 ton of chemicals.
2. The most the United States will trade (give up) is ton(s) of chemicals for 1,000 units of apparel.
3. This implies the following range, or limits, of the terms of trade:

i. 1,000 units of apparel for ton(s) of chemicals (from China's position)
ii. 1,000 units of apparel for ton(s) of chemicals (from the U. S. position)