: How does trade generate profits for all parties? Stupid question, i know, but I'm not financially literate enough and couldn't find proper keywords for Google search on my question. The question arises from the logic that

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There's something called the "greater fool theory of economics", which sets forth the premise that the goal of investing or trading is to find someone who will pay you more for something than you paid for it -- that makes them the "fool", although I don't think it is necessarily foolish to see value and opportunity in something that another person has missed. I would imagine this is the basis on which your understanding of the creation of wealth comes from, and there's nothing wrong with it except that it assumes everything we produce and consume is a zero-sum game, which it isn't.

The flaw in your "sugar versus salt" scenario is that it implies salt and sugar have the same intrinsic value, which they don't. If we each had equal amounts (quantity, not dollar value) of salt and sugar, one of us is going to gain more than the other, because salt is an essential element of life, whereas sugar is more of a luxury that people can do without if necessary. As such, salt would have a much higher imputed value in regions where it is in short supply than sugar would have. Roman soldiers used to be paid in salt, by the way, which is where the saying that "someone isn't worth their weight in salt" comes from.

What the original seller of the sugar did was figure his cost of production and then set a price for it that would allow him to make a profit (the "wealth" part of it). He sold it to someone who thought they could resell the sugar down the road to someone else for more than they paid, and the margin is their profit.

The law of supply and demand is what drives prices for everything. Certainly the sugar scenario you mention is one of those. There may be a stronger demand for sugar in a part of the world where less of it is available, so the guy who bought it from the producer figures out how to move it to where the demand (and price) are greater so that he can make his profit. He may even resell it to someone regional who has a distribution network, and while the margins are thinner, the original buyer bears none of the distribution costs, and he makes up for lower margin by greater volume.

Just because someone else gains doesn't automatically mean that another person loses. If I find sources of sugar that I can resell and make a profit, I haven't "lost" anything simply because another guy who buys it from me can make more money by selling it further down the supply chain.

"Wealth" is created by the margins that people all along the supply chain earn from their role in that chain. The producer makes profit by creating the product or service and then selling it to a wholesaler or distributor, and that distributor or wholesaler makes a profit by reselling it to other distributors, wholesalers, or retailers. Ultimately, the product or service ends up in the hands of the consumer, and everyone along the way made something off the transactions they were a part of.

This is the idea behind "arbitrage". I can buy something inexpensively in China and sell it for more in America, for example. That same item might be produced in America as well, but labor and production costs make it naturally more expensive, so being able to import it from another, less expensive resource allows me to profit by selling it for less than American producers can, and I profit from the margin in between my cost of acquisition and the resale price.

Now, there CAN be scenarios where someone else has to lose in order for you to win. For instance, in options contracts, this can very much be the case. The guy who sells you the put or call option is counting on the premise that the underlying commodity or security will never reach the option's strike price, in which case the option is never exercised, and the seller keeps the entire amount he sold the contract for as profit. BUT, if the strike price is reached and the option is exercised, the seller has to make good on delivering the underlying commodity or security, in which case he may lose big.

Using that as an example, no real "wealth" is created. It is simply transferred from one party to another. Now if your bank account is suddenly much higher than it was, you naturally feel wealthier, but no money or wealth was generated by the transaction that added to your bank balance.

The production of goods and services is what really creates wealth, coupled with the law of supply and demand. If you make shoes, for instance, you buy your raw materials from others who produced them, factoring in their production and labor costs plus a profit. You then make the shoes, factoring in your cost of supplies and labor plus a profit before selling them to the people who need shoes to wear. You as the consumer pay a premium to someone else to provide you with that which you can't (or won't) make for yourself.

Gold is just a rock in the ground until someone comes along and mines it, then does a bunch of things to it in order to convert it into a shiny and desirable product that people gladly pay a hefty premium to own. That's not a zero-sum equation. Something was made from basically nothing, and to pay for it, people had to produce goods or services for which they were paid, and so on.

You can always make a steak dinner at home for far less than it costs you to go to a decent restaurant, but you willingly pay the convenience factor of having someone else do it while you enjoy being waited on. The premium you pay generates wealth for the restaurant, which passes some portion of it on in the form of wages paid, marketing bought, leases paid, and so on.

I hope this sheds a bit of light on your question.

Good luck!