Chapter 6 Number 2

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

Specialization occurs if comparative costs differ.  In this case, Korea (ROK) gives up 1k radio to get 1 ton of chemicals. The USA gives up 0.5 radios to get 1 ton of chemicals. Because these are not the same, Korea and the USA would both benefit if they trade.  Furthermore, the USA should produce chemicals, and the ROK should produce radios. The USA's opportunity cost of producing 1 radio is 2 tons of chemicals, which is greater than Korea's opportunity cost (1 chemical for 1 radio).  Therefore, the USA should produce chemicals and Korea should produce radios.

Overall, this yields a total of 30 radios and 20 chemicals.

b.  What is the total gain in radio and chemical output that would result from such specialization?
There is a great chart in the book with columns titled Before, After, Traded, Output, and Gains.

ROK     24 radios     30 radios     -5 radios     25 radios     +1 radio
              6 chem        0 chem       +7 chem      7 chem        +1 chem
USA      4 radios       0 radios      +5 radios     5 radios       +1 radio
              12 chem      20 chem      -7 chem      13 chem      +1 chem

Total gains are 2 radios (in thousands) and 2 chemicals (in tons)

c.  What are the limits of terms of trade?  Suppose actual terms of trade are 1 unit of radios for 1.5 units of chemicals and that 4 units of radios are exchanged for 6 units of chemicals.  What are the gains from  specialization and trade for each nation? 

Limits to trade: protective tariffs, import quotas, non tariff barriers, and export subsidies.
If those are the actual terms of trade, then the USA would trade 6 chemicals for 4 radios to Korea. The USA would then end up with 20-6=14 chemicals and 0+4=4 radios (+2 chemicals).  Similarly, Korea would have 30-4=26 radios and 0+6=6 chemicals (+2 radios). Therefore, despite the limits to trade, there is still a surplus of 2 chemicals and 2 radios between the two countries.

d.  Can you conclude from this illustration that specialization according to comparative advantage results in more efficient use of world resources?  Explain.
All else being equal, comparative advantage allows for more efficient use of resources. (you can add as you like).