Gains from trade are largest when two parties are similar in terms of preferences.

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Gains from trade are not necessarily largest when two parties are similar in terms of preferences. In fact, gains from trade can arise even when parties have different preferences. This is because trade allows each party to specialize in producing goods or services in which they have a comparative advantage, and then exchange those goods or services with the other party for goods or services in which the other party has a comparative advantage. By doing so, both parties can achieve a higher level of welfare than if they tried to produce everything themselves. This is known as the principle of comparative advantage, and it is one of the key insights of economics.

Gains from Trade Are Largest When Two Parties Are Similar