S/M 15 10 100 200 300 M W/M 500 250 100 200 300 M Figure 1.4 The International Market for Manufactures (M) Free trade takes place where the excess demand from one country equals the excess supply from the other country. At a price of $5/M, excess demand of 200 from the home country equals excess supply of 200 from the foreign country, the foreign country will export 200 units of manufactures to the home country.

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.