Why small countries may gain more than larger countries from international trade?
There is a theoretical possibility that small country may gain more than large countries from international trade. This is because a small country can specialise in the production of single commodity without significantly affecting its price in the international market.
On the contrary, the large country specialises in the production of a single commodity, an increase in its supply will cause a fall in its price, thus adversely affecting the terms of trade.
The small country may be able to trade with a large country at the price ratio prevailing in the large country or very close to it. This brings all gains to the small country.
Offer curve technique may be used to illustrate hypothetical case of special gains from trade to the small countries. Ts, represents the pre-trade exchange ratio in country, which is a very small country, and TL is the pre-trade exchange ratio in country, which is a very large country.
OS is the offer curve of country S and OL is the offer curve of country. Country S is so small that its offer curve crosses the straight line portion of the offer curve of large country.
Thus, international trade takes place at the domestic exchange ratio in country. This enables small country S to capture all the gains.