Where in the lungs does diffusion take place? what gasses are exchanged?

In the alveoli: The lung branches from the large airways (bronchi) to progressively smaller airways and ultimately to terminal or end bronchioles that are connected to tiny air sacs. These are very thin walled and closely associated with tiny blood vessels called capillaries. It is here that gases can pass through the wall of the alveoli into the capillaries and from capillaries to the alveoli for "gas exchange"