Fundamental Theorem of Exchange

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Definition: Fundamental Theorem of Exchange

Full Definition of Fundamental Theorem of Exchange

Proposition: Voluntary trade is mutually beneficial.

“Voluntary exchange benefits all parties involved. An alternative, a mistaken view might be called ‘the exploitation theory’ — the idea that what one side gains in exchange is a loss to the other side.”

This holds as long as we assume that economic actors will not enter into a voluntary exchange that does not serve some self-interest.


  • Clearly, this theorem has its limits and cannot be extended to the claim that a thief enters into voluntary exchange when he withholds violence for a payment in money. (However, this problem does not befall a good-good, or positive-sum exchange.)
  • It has been argued however that a person badly in need of essential resources such as water, would be better served paying for these in times of scarcity as opposed to waiting on the benevolence of others.
  • It could also be argued that the thief example does hold with this theorem. If the other individual had options of not paying the ransom and enduring violence or paying the ransom and avoiding violence and they were to pay the ransom, you could argue that both sides are better off. Why would the compromised individual pay the ransom if they were better off by not paying and enduring violence? This is not an ideal situation, but the thief is clearly better off with the ransom money (his income has increased) and the compromised individual would be better off if they valued safety more than the ransom money.

The degree to which these conjectures are similar, or different, is a function of priors not addressed by the Theorem.

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Definition Sources

Definitions for Fundamental Theorem of Exchange are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 4th August, 2021 | 0 Views.