II. For each statement 1-3, mark one for the answer you choose.

1. Managed trade relies on:

A. free market.

B. existing comparative advantage.

C. government intervention.

2. Industries might find their profit bolstered because:

A. They are protected from export.

B. They are protected from importation of cheap goods.

C. They are very efficient.

3. The liberals are convinced that sensible constructive managed trade is:

A. possible in the US democratic system.

B. possible in the UK.

C. hardly possible.

III. Are sentences below “right” or “wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. Advocates of managed trade claim that governments may intervene in trade.

A. Right B. Wrong C. Doesn’t say

2. Economic liberals argue that free trade may allow the importation of harmful goods.

A. Right B. Wrong C. Doesn’t say

3. Supporters of managed trade insist on legal and administrative barriers.

A. Right B. Wrong C. Doesn’t say

4. Critics of free trade don’t believe in sensible, constructive managed trade.

A. Right B. Wrong C. Doesn’t say

5. The argument for restricting trade is the danger of the establishment of a foreign-based monopoly.

A. Right B. Wrong C. Doesn’t say

IV. Match each of these statements with one of the paragraphs numbered 1-8.

A. Although there are many circumstances in which international trade can make countries better off, international trade can also carry costs.
B. Countries may also promote their own industries by subsidies.
C. The government can’t remain objective in the face of political lobbyists.
D. Managed trade is a debating point.

Concentration ratios

Measuring the degree of competition

We can get some indication of how competitive a market is by observing the number of firms: the more the firms, the more competitive the market would seem to be. However, this does not tell us anything about how concentrated the market might be. There may be many firms (suggesting a situation of perfect competition or monopolistic competition), but the largest two firms might produce 95 per cent of total output. This would make these two firms more like oligopolists.

Thus even though a large number of producers may make the market seem highly competitive, this could be deceiving. Another approach, therefore, to measuring the degree of competition is to focus on the level of concentration of firms.

The simplest measure of industrial concentration involves adding together the market share of the largest so many firms: e.g. the largest three or the largest five. This would give what is known as the “3-firm” or “5-firm concentration ratio”.

The table (Fig. 1) shows the 5-firm concentration ratios of selected industries in the UK. As you can see, there is an enormous variation in the degree of concentration from one industry to another.

One of the main reasons for this is difference in the percentage of total industry output at which economies of scale are exhausted. If this occurs at a low level of output, there will be room for several firms in the industry which are all benefiting from the maximum economies of scale.

Differences in the economies of scale are not the only cause of differences in concentration. The degree of concentration will also depend on the barriers to entry of other firms into the industry and on various factors such as transport costs and historical accident. It will also depend on how varied the products are within any one industrial category. For example, in categories as large as “clothing” and “toys and sports goods” there is room for many firms, each producing a specialized range of products. Within each sub-category, e.g. tennis racquets, there may be relatively few firms producing.

So is the degree of concentration a good guide to the degree of competitiveness of the industry? The answer is that it is some guide, but on its own it can be misleading. In particular it ignores the degree of competition from abroad, and from other areas within the country. Thus the five largest UK motor vehicle manufacturers may produce 82.9 per cent of UK vehicle output, but these manufacturers face considerable competition from imported cars and lorries. On the other hand, the five largest water suppliers may account for only 49.7 per cent of UK output, but within their own regions of the country they have a monopoly.

Figure 1

Industry	5-firm concentration ratio
Tobacco products	99.5
Iron and steel	95.3
Asbestos goods	89.8
Motor vehicles and engines	82.9
Cement, lime and plaster	77.7
Grain milling	62.3
Water supply	49.7
Footwear	48.2
Bread, biscuits, etc.	47.0
Carpets	21.8
Clothing	20.7
Bolts, nuts and springs	11.4
Processing of plastics	8.8