Which of the following best characterizes the relationship between the parties to a trade and the gains from trade?
A) Gains from trade are fueled by differences in preferences and differences in opportunity costs of production.
B) Gains from trade are fueled by differences in preferences only.
C) Gains from trade are fueled by differences in opportunity costs of production only.
D) Gains from trade are greatest when there are no differences between the two parties to trade.

Question

Quizplus · Accepted Answer

Gains from trade are fueled by both parties having different preferences and different opportunity costs of production. If both parties had identical preferences and opportunity costs, there would be no incentive for either party to trade. Differences in preferences allow for one party to specialize in producing a good or service that the other party values more, while differences in opportunity costs allow for both parties to specialize in the goods or services they can produce at a lower opportunity cost. The combination of these differences creates gains from trade.

Which of the Following Best Characterizes the Relationship Between the Parties