Question

Assume that a large country is trading with a much smaller country.

a.) What generalization can be made about the relative gains from trade?

b.) What theory is your answer to part a based on?

c.) Briefly explain this theory.

Answer 1

a.) The smaller country will gain more trade compared to the large country

b.) The Ricardian models states a small country will enjoy higher gains from trade compared to the large country

c.) The Ricardian models states a free trade price will usally be somewhere between the two autarky prices among the trading nations. But when one nation is very large, then the free trade price can fall to the autarky price of the large nation and thus it may does not gain at all, while small nation enjoys all the gains from trade.