Question

Suppose that Spain has a comparative advantage in hats and Portugal has a comparative advantage in doormats. Under a system of free trade, each country specializes and then trades with the other. If the price starts at four hats per doormat, and then increases to five hats per doormat, then: Group of answer choices some of the gains from trade shift to Spain. some of the gains from trade shift to Portugal. people in Portugal will not want to buy as many hats. Spain no longer has a comparative advantage in hats.

Answer 1

Answer:

Some of the gains from trade shift to Portugal.

Explanation:

The law of comparative advantage describes how agents produces more of and consumes less of a good for which they have a comparative advantage in. Agents have a comparative advantage if they produce a good at a lower marginal cost prior to trade. Contrary to it, agent has an absolute advantage if they produce a good more productively, or more quantity of goods for a less amount of resources.

In this example, if the price of doormat increases to 5 hats per doormat, Spain will have to produce hats to get 1 doormat. Contrary to it, Portugal will get more hats for producing the same amount of doormats as before.

So, to conclude, Portugal will gain from this trade.