Lecture Notes: Business Cycle Analysis & Foreign Market Research

Block 1: Foreign Market Research

Foreign market research is crucial for achieving sustainable export success in international
markets. It helps avoid costly expansion mistakes, identify business opportunities, and
minimize risks through proactive data collection and analysis.

Key aspects include assessing demand for products, analyzing export destinations, and
identifying potential markets. Research can be conducted through secondary sources (e.g.,
reports and surveys) or primary methods like interviews and questionnaires.

Steps in the market research process:

1. Screening potential markets based on economic stability and trade agreements.
2. Assessing target markets by collecting detailed data, including cultural and competitive
factors.
3. Drawing conclusions to decide on the most viable markets.

Institutions supporting foreign market research include agencies like Austrade, Business
France, and the U.S. Department of Commerce.

Block 2: Business Cycle Fundamentals

Business cycles refer to the fluctuations of GDP around its long-term trend, encompassing
phases such as expansion, peak, contraction, and trough. These cycles are influenced by
aggregate demand, government policies, and external shocks.

GDP is a key measure of economic output, calculated through:

- The expenditure method: GDP = C + I + G + (X - M).
- The value-added method, focusing on the incremental value at each production stage.
- The income method, summing wages, profits, and taxes minus subsidies.

Real GDP adjusts for inflation using deflators, providing a clearer economic picture.
However, it does not fully capture wealth distribution, quality of life, or environmental
factors.

Block 3: Auxiliary Indicators and Trade Balance

Unemployment and inflation are auxiliary indicators of business cycles. Types of
unemployment include:
- Frictional: Temporary and voluntary due to job transitions.
- Structural: Mismatch between labor supply and demand.
- Cyclical: Resulting from reduced aggregate demand.

Inflation impacts purchasing power and economic stability. The Philips Curve suggests an
inverse relationship between inflation and unemployment, though this varies across
economies.
Trade balance, a GDP component, reflects net trade (exports minus imports). While less
cyclical, it provides insights into economic health and global trade dynamics.
BUSINESS CYCLE ANALYSIS &FOREIGN MARKET RESEARCH

LECTURE 1: CONTENTS OF LECTURE:

- FOREIGN MARKET RESEARCH

- BUSINESS CYCLE FUNDAMENTALS

1. FOREIGN MARKET RESEARCH

- Foreign market research is vital to sustainable export success in international

markets. it is a process that can help you avoid costly expansion mistakes and
identify extraordinary business opportunities, allowing you to minimize risk before
you enter a foreign market through proactive data collection and analysis.

Business opportunities:

- International market research is a key piece of successful export planning. it is

important to critically review and assess demand for your product, as well as factors
related to a given export destination. the information will maximize your company’s
efforts while keeping the export plan cost and time-efficient. our resources can help
you compare markets and target the right ones.

- Market research is the process identifies exportation opportunities, detects new or

emerging markets, and uncovers the preferences of potential customers. it can be
beneficial regardless of the company size
FOREIGN MARKET RESEARCH – WHAT?HOW?

- Market research involves the collection and analysis of data at successive levels of
detail, with the overarching intent of identifying compatible target markets.

- Foreign market research is the process of gathering, analyzing and interpreting

information about a market and the individuals it consists of. Internationally,
market research is crucial to determine potential market compatibility and draw
comparisons between markets. Types of market research:

• secondary market research,

• primary market research.

- Some forms of market research are more economical and less time consuming than
others. However, it is always recommended to collect as much relevant information
as possible during the process so that decision-making is well-informed

- Secondary market research- the data collection has been completed previously
by an external source providing the opportunity to repurpose this information.
Secondary research typically consists of reports, studies, books and surveys, the
vast majority of which can be found online. This means that the process is often very
affordable in nature, presenting little risk in assembling a substantial amount of
information relatively quickly. One drawback of secondary market research is that it
is often specialized for the purposes of the original user, thus the interpretation of
secondary data is often used in conjunction with other methods, and acts as a solid
foundation in the early stages of market research

THE ONE YOU WILL CONDUCT THROUGHOUT OUR SEMINARS !

- Primary market research- involves a first-hand approach, and is a more

exhaustive form of collection and analysis. Consequently, this type of research is
more time consuming and has a larger financial burden, but in turn offers a
personalized data that can be analyzed extensively to draw conclusions and make
decisions. This research will require some type of on-site behaviour to be completed
accurately, which is an important factor to consider when evaluating prospective
locations to export your goods or services. It is essential to contact potential
customers and respondents directly, commonly taking place in the form of personal
 interviews, questionnaires, or consultations. Various forms of statistical analysis can
also be performed on primary research figures, allowing for appropriate
interpretation of market compatibility and a quantitative comparison based
decision-making process. Research should be well-designed and its objectives
should be well defined

✓ Steps in the market research process

1. Screenpotential markets

This step of the market research process involves identifying and collecting statistics
concerning the markets. It allows selecting markets which appear to be in stable economic
growth with minimal fluctuations. It is also proactive to consider markets that are small and
emerging, as they tend to offer a high degree of potential market share due to a limited
presence of competition.

When evaluating prospective markets, it is wise to take free trade agreements (FTAs) into
consideration. Countries that have already laid the groundwork for simplified trade can be
much easier to export to than others, not-to-mention much cheaper
 2. Assess target markets

Assessing markets is a process that involves a more extensive approach than the initial
screening; however, it encompasses much fewer candidates. The aim of this step is to collect
as much applicable information as possible in order to provide a strong basis for
comparison between the remaining markets.

Part of this assessment process involves identifying noteworthy appraisal factors for
consideration in each viable location, such as cultural norms and growth rates. Level of
competition in each market is also a key consideration in this stage, as the relative success
of rivals in a market of mutual interest could forecast similar success for your business

3. Draw conclusions and make decisions

This stage can only begin once the assessment of the potential target markets is complete
and the entirety of the data has been analyzed. Evaluating this information involves
extracting qualitative meaning from analyzed data, which when done correctly should lead
to a final decision regarding which market(s) to actually expand into.

FOREIGN MARKET RESEARCH – WHO?

- Market research is the process can be beneficial regardless of the company size.
- Respective economies do have dedicated institutions that support companies in
foreign market research (and internationalization advice), e.g.:

• Polish Investment and Trade Agency (PAIH)

• Australian Trade and Investment Commission (Austrade)

• Business France

• Switzerland Global Enterprise

• Italian Trade Agency (ITA)

• UK Department for International Trade

• U.S. Department of Commerce

Foreign market research – our learning approach

✓ Facing the very first step of internationalization process, i.e. foreign market research in
respect of understanding given market and its export potential.
✓ Respective phases (steps):

• analysis of socioeconomic profile of a country, including its economic cycle

analysis

• analysis of product lifecycle analysis, in a general context as well as in a researched

country context

• analysis of competition on researched country-product market (Porter's five

forces of competitive position, market concentration assessment)

• analysis of demand and supply dynamics (structural analysis of consumers/buyers

and producers/suppliers, analysis of key drivers/determinants, analysis of major
shocks, consideration for import/export demand)

• price analysis and market organization analysis

• analysis of position of researched country-product market in a global trade context

BUSINESS CYCLE FUNDAMENTALS

Business cycles and growth cycles

✓ The economic cycle, also known as “business cycle” – economic cycles are the recurrent
boom-and-bust phases that markets and economies typically exhibit. Think of it like a wave:

− Expanding from a trough,

− Peaking at the crest,

− Descending (“contracting”) from the high point, and

− Hitting bottom and recovering, where the wave begins anew.

[Britannica Money]

✓ In modern economies, actual economic output (GDP, or gross domestic product) does not
grow smoothly over time. We may distinguish some trend of output which the 00:55
economy follows in the long run. In the short run, however, the actual GDP fluctuates
around this trend.
✓ The business cycle is the short-run fluctuation of GDP around its trend

A – the trough of a cycle where GDPis at

its local minimum SLUMP

B – the period of expansion RECOVERY

PERIOD

C – the peak of a cycle where GDPis at its

local maximum

D – the period when output drops and the

economy suffers a recession
CONTRACTION PERIOD

E – a new trough

✓ The business cycle phases

✓ The business cycle phases through growing trend– growth paradigm

The Organization for Economic Co-operation and

Development (OECD) has proclaimed that for a good
portion of the 20th century there was an implicit
assumption that economic growth was synonymous with
progress: an assumption that a growing Gross Domestic
Product (GDP) meant life must be getting better” (OECD,
2008, cover text). And indeed, the dominance of the growth
imperative is hard to ignore: growth statistics regularly
appear on the front pages of newspapers, play a key role in
economic analyses, and pervade political debates, not only
across the political spectrum but also in all countries.
Business cycles– traditional and alternative approach

✓ The traditional approach to business cycle and economic growth analysis is the following:
the economy exhibits a long-run trend of output, but real GDP exhibits fluctuations around
this trend. These fluctuations have, however, a short-run nature and, in the long run, GDP
returns to a trend path.

✓ The problem facing economists is to separate the two components of output dynamics:
trend and cyclical fluctuations. In the traditional approach, short-run GDP fluctuations
around the trend result mainly from the volatility in aggregate demand, thus all deviations
of output from the trend are treated as temporary.

✓ Such temporary deviations can be however regarded differently, e.g. according to

Keynesians, deviations of actual output from the trend may be severe and take a relatively
long time (they support the government stabilization policy), while 00:55 monetarists and
proponents of the new classical school treat deviations as much smaller and shorter (they
are against an active government interventions).

✓ Alternatively, some economists argue that the primary source of output fluctuations is a
stochastic variation due to real factors. Nelson and Plosser (1982) came to such conclusion
by examining the US economy. They could not reject the hypothesis that US GNP followed a
path of a random walk. Thus, they have stated that the majority of changes in output is
permanent, not temporary, as after a shock, the economy does not return to the previous
trend path. We can say, therefore, that GDP behaves in line with a random walk

Early stage: activity rebounds (GDP, employment) • credit begins to grow • profits grow
rapidly • policy still stimulative • inventories low; sales improve
Mid stage: growth peaking • credit growth strong • profit growth peaks • policy neutral •
inventories and sales grow; equilibrium reached

Late stage: growth moderating • credit tightens • earnings under pressure • policy
contractionary (restrictive) • inventories grow, sales growth falls

Recession stage: falling activity • credit dries up • profits decline • policy eases •
inventories, sales fall

LECTURE 2: CONTENTS OF LECTURE:

GDP as a measure of economic output

Spotlight on Poland and other economies

Business cycles – GDP and more

GDP AS A MEASURE OF ECONOMIC OUTPUT- CONTEXT OF BUSINESS CYCLE

Business cycles and growth cycles

✓ The business cycle is the short-run fluctuation of GDP around its trend

A – THE TROUGH OF A CYCLE WHERE GDP IS AT

ITS LOCAL MINIMUM

B – THE PERIOD OF EXPANSION

C – THE PEAK OF A CYCLE WHERE GDP IS AT ITS

LOCAL MAXIMUM

D – THE PERIOD WHEN OUTPUT DROPS AND THE

ECONOMY SUFFERS A RECESSION

E – A NEW TROUGH WITH GDP MINIMUM

GDP AS A MEASURE OF ECONOMIC OUTPUT

Gross domestic product (GDP) – features

✓ GDP includes the level of output produced by the factors located in a given
country

regardless of the ownership, i.e. it measures goods and services produced

in a territory of a given country (economy) by the factors owned by both domestic

and foreign entities.

✓ GDP measures only the final output, that is the goods and services which go to the

final customers, e.g. to produce a chair, some wood and canvas are needed, but GDP

includes only the value of a chair as a final product, and not the value

chair, wood and canvas altogether, as that would be double counting.

✓ GDP includes only the output which is officially registered i.e. it does not measure

goods or services produced for own purposes, neither it measures the output

of the informal economy (black market).

✓ GDP measures the level of output in money terms, and it does not necessarily

capture quality of goods or services.

 ✓ GDP measures only the economic output and it does not consider any other
aspects influencing the standard of living, e.g. it does not account for considerations such as
crime and violence, environmental pollution, health, education level, development of
infrastructure, or happiness.

✓ GDP measures only the aggregate level of output and not the distribution of
income throughout the society; between two hypothetical countries which have the same
level of GDP, the one experiencing income accumulation by few extremely rich persons with
rest of the society owning nothing will supposedly offer much worse standard of living
compared to a country where income is distributed smoothly across the society and the
differences between the richest and the poorest persons are reasonable.

✓ GDP measures only the level of output produced in a given period, and it does not
necessarily measure wealth inherited from previous generations.

A. The expenditure method:

GDP=C+I+G+X–M=C+I+G+NX

✓ GDP measures only expenditures on final goods and services and not
expenditures on both final and intermediate goods and services

✓ GDP is measured at market prices (final consumers pay market prices for
the goods and services they purchase, i.e. the prices which include indirect taxes but
exclude subsidies to firms)

✓ GDP covers the level of output produced, while expenditures (aggregate

demand) measure only output which is sold, thus either investment (the ’I’
component) of expenditure method should include inventories (change in stocks) or
expenditure method equation needs to be augmented:

GDP = C + I + ΔStocks+ G + NX

B. The value added method:

GDP=Σvalue added = global output– intermediate output (consumption)

✓ method of measuring GDP referring to the concept of the value added

✓ the value added is an increase in the value of a good or service in a given

production process (a concept underlying the value-added tax or VAT)
 ✓ GDP is measured at factor prices, i.e. the prices which exclude indirect taxes but
account for subsidies to firms (to obtain GDP at market prices, GDP at factor prices
need to be adjusted by indirect taxes addition and subsidies subtraction)

C. The income method:

GDP = income = the gross profit of companies and the self-employed + the wages of
employees + the indirect taxes - subsidies

✓ the income approach states that all economic expenditures should equal the total
income generated by the production of all economic goods and services

✓ the income approach implicitly assumes that all revenues must go to one of the
sources of production factors (land, capital, labor, entrepreneurship)

Gross domestic product (GDP) – nominal versus real notion

✓ real GDP=nominal GDP / GDP deflator (x 100)

✓ in national income accounting, the price indices that are used for converting
nominal variables into real variables are not the typical inflation indices, like CPI, but
dedicated macroeconomic indices, so called GDP or GNP deflators

✓ unlike inflation indices, GDP or GNP deflators include price changes of all the
goods and services that are included in GDP or GNP (not only price changes of defined
baskets of goods and services)

✓ GDP deflators:

▪ Poland2021 = 117,5 ; Poland2022 = 129

▪ US2021 = 113,1 ; US2022 = 122

▪ UK2021 = 113,8 ; UK2022 = 119

Gross domestic product (GDP) – circular flow in the economy

C – CONSUMPTION I – INVESTMENT G – GOVERNMENT EXPENSES X – EXPORTS M – IMPORTS S –

SAVINGS (EQUAL I) T E– INDIRECT TAXES S B– SUBSIDIES T D – DIRECT TAXES B– BENEFITS D–
DIVIDENDS TO GOVERNMENT

UPWARD SLOPING

DOWNWARD SLOPING

FLATTISH
SPOTLIGHT ON POLAND AND OTHER ECONOMIES

BUSINESS CYCLES – GDP AND MORE

GDP as a ’holy grail’ but not a sole indicator of business (economic) cycles

✓ unemployment

✓ wages

✓ inflation

✓ Philips curve phenomenon

✓ income(and socioeconomic) inequalities

and how about quality of life? Happiness?

UNEMPLOYMENT AND WAGES –AUXILIARY ECONOMIC CYCLE INDICATORS ?

Types of unemployment

✓ Involuntary unemployment includes persons who want to work at the current wage rate,
but they cannot find a job due to low demand for labor.

✓ Voluntary unemployment includes persons who simply do not want to work at the
prevailing wages. They are registered at the labor market as unemployed because, for
example, they want to receive unemployment benefits or health insurance.

❖ Frictional unemployment results from the fact that labor market equilibrium is not static.
Frictions are the factors (e.g. imperfect information) that make difficult matches at the labor
market between persons who are seeking a job and firms which are looking for workers.
For example, at any point in time there are workers who are changing a job and due to
imperfect matches they are temporarily unemployed. Frictional unemployment is
completely voluntary and cannot be easily reduced by the government policy. Such
unemployment is a component of so called natural unemployment
Types of unemployment

❖ Structural unemployment means that the structure of labor demand does not fit that of
labor supply. This type of unemployment results from the fact that economy structure
changes over time and supply of labor does not keep pace with demand for labor. For
example, technological progress may lead to the increased demand for computer
programmers while the unemployed persons are specialists in mining or fisheries. In this
case, vacancies coexist with unemployed persons. Such unemploymentis a component of so
called natural unemployment.

❖ Cyclical Keynesian unemployment appears in the case of a negative macroeconomic

demand-side shock resulting in the fall of aggregate demand. If aggregate demand is low,
labor demand is low as well. Before wages and prices fully adjust to the new situation,
unemployment emerges. This is entirely involuntary unemployment and– in the case of low
labor market elasticity it may last very long.

❖ Classical unemployment. According to the classical model, all the markets clear
immediately implying that output is at the potential level and labor market is in
equilibrium. However, official statistics for various countries demonstrate that high
unemployment may be present for quite a long time and it is by no way entirely voluntary
UNEMPLOYMENT AND WAGES

The unemployed are people of working age who are without work, are available for work,
and have taken specific steps to find work.

The uniform application of this definition results in estimates of unemployment rates that
are more internationally comparable than estimates based on national definitions of
unemployment. This indicator is measured in numbers of unemployed people as a
percentage of the labour force and it is seasonally adjusted. The labour force is defined as
the total number of unemployed people plus those in employment. Data are based on labour
force surveys (LFS). For European Union countries where monthly LFS information is not
available, the monthly unemployed figures are estimated by Eurostat

UNEMPLOYMENT RATE

Volatile and cyclical ---- May be an indicator used for economic(business) cycle analysis

WAGE

Steady not cyclical--- May be inappropriate for economic(business) cycle analysis

INFLATION (AND PHILIPS CURVE) – AUXILIARY ECONOMIC CYCLE INDICATOR

INFLATION- BASIC CONCEPTS

Inflation is the increase in the average price of goods and services over time. Inflation and
unemployment are regarded as the major illnesses of modern economies. There is of course
no single unambiguous answer to the question which phenomenon: inflation or
unemployment is worse. One of the arguments against inflation is that it touches almost
everybody: all the firms and households. There is no easy way to avoid inflationary effects
by a single individual or by a single firm.

- Pure inflation occurs if the prices of all the goods and services and factors of
production rise at the same rate.
- Hyperinflation is the situation when inflation rates are very high. There is no fixed
level above which inflation rates are classified as hyperinflation. However, annual
inflation rate of about several hundred percent or more are undoubtedly
hyperinflation.
- Deflation occurs when prices fall. As such, deflation is– in other words– a negative
inflation.
INFLATION RATE

Volatile cyclical--- May be indicator used for economic (business) cycle analysis

TRADE FLOWS , TRADE BALANCE – GDP-RELATED INDICATORS

Trade flows and trade balance (net trade) as a componentof economic activity and GDP-NX

NET TRADE

Rather steady, rather not cyclical – May be inappropriate for economic(business) cycle
analysis

LECTURE 3: Contents of Lecture:

▪ Business (economic) cycles – indicators and forecasting

▪ OECD Composite Leading Indicator (CLI) across selected economies

▪ Other economic cycle indicators

BUSINESS (ECONOMIC) CYCLES – INDICATORS AND FORECASTING

Background

✓ The provision of reliable economic forecasts has long been one of the principal
challenges facing economists. This continues to be an important way in which the
economics profession contributes to the operation of business and government.

✓ The technological advances have led to the development of new methods for
economic forecasting with sufficient scope to provide serious competition to more
traditional structural econometric models and to judgmental forecasts.

✓ The traditional focus of economic forecasting has been the forecasting of growth
rates (real GDP, GNP) or levels (e.g. interest rates) of economic variables. However,
nontechnical audiences– the business press, politicians, and business people– are often less
interested in growth rate forecasts than in answers to simple questions, such as “Are we
going to be in a recession next year?” or “When will the current recession end?
Background – main findings relating to economic forecasting

✓ At any point in time, and for any economic variable, there is typically great
dispersion across forecasts, which typically increases with the forecast horizon.

✓ Macroeconomic variables differ greatly in the ease with which they are forecast:
growth in real GNP/GDP and consumption were forecast better than inflation, residential
investment, and changes in business inventories.

✓ Over the early period of economic forecasting development there were no large
systematic improvements in forecast accuracy: although inflation forecast accuracy
increased, the accuracy of real GNP/GDP forecasts decreased.

✓ Combined forecasts, in the form of group mean forecasts, are generally more
accurate than individual forecasts.

Background – the OECD System of Composite leading Indicators

✓ The OECD system of composite leading indicators was developed in the 1970’s to
give early signals of turning points of economic activity. This information is of prime
importance for economists, businesses and policy makers to enable timely analysis of the
current and short-term economic situation.

✓ The OECD composite leading indicators (CLIs) are constructed to predict cycles in
a reference series chosen as a proxy for economic activity:

▪ fluctuations in economic activity are measured as the variation in economic output

relative to its long term potential

▪ the difference between potential and observed output is often referred to as the output
gap

▪ The fluctuation in the output gap is referred to as the business cycle.

Background – design of OECD CLIs

✓ OECD CLIs are constructed from economic time series that have similar cyclical
fluctuations to those of the business cycle but, and importantly, which precede those of the
business cycle.

✓ GDP is the obvious choice in this context but official estimates are typically only
available on a quarterly basis, whereas the CLI is a monthly statistic.
 ✓ Until March 2012 therefore, the OECD system of composite leading indicators has
used the index of industrial production (IIP) as a reference series, which is available on a
monthly basis and has also, historically at least, displayed strong co-movements with GDP.

✓ In March 2012 however the OECD has investigated whether methods could be
applied to generate monthly estimates of GDP based on the official quarterly estimates. This
investigation has demonstrated that it is feasible to do so, whilst also continuing to provide
high quality results.

✓ From April 2012 therefore the OECD has switched to using GDP as the reference,
ceasing to rely on the IIP as an intermediate target.

✓ Composite Leading Indicator (CLI) is designed to provide early signals of turning

points (peaks and troughs) between expansions and slowdowns of economic activity. CLIs
are calculated for 33 OECD countries (Iceland is not included), 6 non-member economies
and 8 zone aggregates. A country CLI comprises a set of component series selected from a
wide range of key short-term economic indicators. The OECD has published CLIs since 1981

EARLY SIGNAL DOES NOT IMPLY ANY LONGER TERM FORECAST

OECD’s CLI: ’predicting’ which phase of economic cycle is about to come, ’predicting’ in
which point of business cycle phase economy stands

OECD’s GDP forecast: is based on an assessment of the economic climate in individual

countries and the world economy, using a combination of model- based analyses and expert
countries and the world economy, using a combination of model-based analyses and expert
judgement. This indicator is measured in growth rates compared to previous year
OECD COMPOSITE LEADING INDICATOR (CLI) ACROSS SELECTED ECONOMIES

CLI (COMPOSITE LEADING INDICATOR )

✓ The components of the CLI are time series which exhibit leading relationship with
the reference series (GDP) at turning points.

✓ Country CLIs are compiled by combining de-trended smoothed and normalized

components.

✓ The component series for each country are selected based on various criteria such
as economic significance, cyclical behaviour, data quality, timeliness and availability.