International trade guarantees that countries that engage in trade all benefit by exactly the same amount. Is this statement true or false? Explain your answer.

Question

Quizplus · Accepted Answer

The gains from trade are distributed between countries based on the terms of trade. The reciprocal demand theory indicates that the final terms of trade depends on the relative strength of each country's demand for the other country's product. The country with the greater demand for the other country's product will be willing to sacrifice more of its goods in exchange for that product. The resulting exchange ratio will distribute more of the gains from trade to the country whose good has greater demand relative to the demand of the other country. In addition, if the two countries are of unequal size (population or income), it is possible that the larger country's demand would be greater than the smaller country's demand. When this happens the smaller country gains more from trade than the larger country.

International Trade Guarantees That Countries That Engage in Trade All