The hypothetical figures in Table give five alternate combinations of steel and autos that Japan and South Korea can produce if they fully use all factors of production at their disposal with the best technology available to them. On graph paper, sketch the production possibilities schedules of Japan and South Korea. Locate steel on the vertical axis and autos on the horizontal axis of each nation’s graph.

a. The production possibilities schedules of the two countries appear concave, or bowed out, from the origin. Why?
b. In autarky, Japan’s production and consumption points along its production possibilities schedule are assumed to be 500 tons of steel and 600 autos. Draw a line tangent to Japan’s autarky point and from it calculate Japan’s MRT of steel into autos. In autarky, South Korea’s production and consumption points along its production possibilities schedule are assumed to be 200 tons of steel and 800 autos. Draw a line tangent to South Korea’s autarky point and from it calculate South Korea’s MRT of steel into autos.
c. Based on the MRT of each nation, should the two nations specialize according to the principle of comparative advantage? If so, in which product should each nation specialize?
d. The process of specialization in the production of steel and autos continues in Japan and South Korea until their relative product prices, or MRTs, become equal. With specialization, suppose the MRTs of the two nations converge at MRT = 1. Starting at Japan’s autarky point, slide along its production possibilities schedule until the slope of the tangent line equals one. This becomes Japan’s production point under partial specialization. How many tons of steel and how many autos will Japan produce at this point? In like manner, determine South Korea’s production point under partial specialization. How many tons of steel and how many autos will South Korea produce? For the two countries, do their combined production of steel and autos with partial specialization exceed their output in the absence of specialization? If so, by how much?
e. With the relative product prices in each nation now in equilibrium at 1 ton of steel equal to 1 auto (MRT = 1), suppose 500 autos are exchanged at this terms of trade. (1) Determine the point along the terms-of-trade line at which Japan will locate after trade occurs. What are Japan’s consumption gains from trade? (2) Determine the point along the terms-of-trade line at which South Korea will locate after trade occurs. What are South Korea’s consumption gains from trade?

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STEEL AND AUTO PRODUCTION JAPAN SOUTH KOREA Steel (tons) 520 500 350 200 Autos Steel (tons) 1200 900 600 Autos 600 1100 1300 1430 400 650 800 810