Understanding Market Dynamics: Competition, Demand, and Balance of Payments

Posted on May 17, 2024 in Economy

Balance of Payments

The balance of payments systematically documents all economic transactions between residents of a country and other residents of the world for a specific time period (typically one year).

Structure

Current Account Balance:

  • Merchandise Trade (Trade Balance): Imports and exports of goods.
  • Services: Tourism, transport, telecommunications, financial services, healthcare, etc.
  • Income: Includes income from labor (salaries) and capital (interest).
  • Current Transfers: Includes remittances sent by migrants to their countries of origin.

Capital Account Balance:

  • Capital transfers of both the private and public sectors.
  • Acquisition and sale of non-produced, non-financial assets.

Financial Account Balance:

  • Direct Investment: To establish enterprises or merge with existing ones in the country.
  • Portfolio Investment: Buying stocks or other securities for the sole purpose of obtaining profitability.
  • Other Investment: Loans.
  • Change in reserves of gold or currency.

Balance of Errors and Omissions:

Serves to balance all the accounts.

Competition

Analyzing competition in a market involves determining the competitive structure, which provides relevant information to understand the overall market structure. This information can be summarized as follows:

  1. Market participation of each competing firm.
  2. Hierarchy of market companies.
  3. Effect of competitors’ marketing policies in the market.

For competition to exist, the following circumstances must be present:

  1. All businesses seek a competitive advantage, to be perceived as the best.
  2. All companies surviving in a particular market have some type of competitive advantage.
  3. The smaller the difference between the competitive advantages of companies, the more similar their positions will be, and competition will be stronger.
  4. Competitive equilibrium is held when forces are rapidly restored after any modification.
  5. Market dynamism depends on the force of competition.

These circumstances must be taken into account to answer: Who are the competitors? How is the competition in the market?

Macroeconomic Dimensions

  • Demographic: Population size, birth and death rates, age structure, family size, and population movements.
  • Economic: National income per capita and income distribution, growth-recession, unemployment, interest rates, inflation, monetary and fiscal policy.
  • Socio-cultural: Social classes and groups, forms of purchase and consumption, education system, incorporation of women into the workforce, lifestyles.
  • Political: National and international legislation, political system.
  • Technological: Research, innovation and development, technology diffusion.
  • Environmental: Resource allocation.

Structure of Demand

  1. Product Dimension: Global generic product demand, product category demand, product line demand, specific product demand, demand for a particular brand.
  2. Market Dimension: Demand for the entire target market, demand for particular groups.
  3. Temporal Demand: Time period for which demand is studied (e.g., 1 year), and grade according to the seasonality of the product type.
  4. Geographical Dimension: Geographical settlement of final customers, demand can be local, regional, national, international, or global.
  5. Value Dimension: Demand can be measured in physical units, monetary units, or market share.

Demand is classified as final when consumers demand an end product, and derived when the product enters another conversion process. Demand is fluctuating in nature. To try to reduce fluctuation, marketing mix strategies are used. However, demand-related effort is not a direct cause-and-effect relationship. The reasons for this situation are:

  • The effectiveness of the marketing effort is not always commensurate with its cost.
  • There is a saturation level in the implementation of marketing, from the consumer’s perspective, due to the presence of many brands.
  • Diminishing marginal returns: As demand approaches its ceiling, the yields achieved with marketing efforts decrease.
  • Differences in consumer response: Consumers do not always respond to marketing stimuli in the same way.

Demand Forecasting

Various methods are used for demand forecasting depending on:

  • Forecast term (short, medium, long).
  • Availability of reliable data (product already in place in the market or new products without data).
  • Accuracy required for the estimate (depending on the target market).

Before describing the various methods, it is useful to note the following:

  • No method of foresight is perfect.
  • Forecasting methods are more accurate when they have more goals.
  • Demand forecasting essentially aims at reducing uncertainty.