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Explain whether a large or small country would be expected to gain more from international diversification.

Explain whether a large or small country would be expected to gain more from international diversification.

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Answer #1

Small country would be expected to gain more from international diversification. This is because, on a comparative basis, large countries offer significant diversification possibilities. The small countries do not offer significant diversification possibilities.

There will be a lower quantum of appetite for the large country to hold the currency of the small country but on the other hand the small country will have a significant appetite to hold the currency of the large country. The concept of decreasing marginal benefits associated with diversification will be more amplified for the large country than for the small country and it is for this very reason that small country would be expected to gain more from international diversification.

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