Business and Economic Forecasting. Mohammad Arief. Overview . Demand Forecasting is a critical managerial activity. Qualitative . Quantitative . Gives the expected direction Up, down, or about the same. Gives the precise amount or percentage. THE SIGNIFICANCE OF FORECASTING.
Demand Forecasting is a critical managerial activity
Gives the precise amountor percentage
Predicting changes in cost, price, sales, and interest rates
Accurate forecasting can help develop strategies to promote profitable trends and to avoid unprofitable ones
The forecasting technique used in any particular situation depends on a number of factors.
The choice of a particular forecasting method depends on several criteria:
The smaller the value of the RMSE, the greater the accuracy
A sequence of the values of an economic variable at different points in time.
An array of the values of an economic variable observed at thesame time, like the data collected in a census across many individuals in the population.
These are long-run trends that cause changes in an economic data series
These are major expansions and contractions in an economicseries that are usually greater than a year in duration
Seasonal variations during a year tend to be more or lessconsistent from year to year.
an economic series may be influenced by random factors that are unpredictable
Yt+1 = Yt
Yt+1 = Yt + (Yt - Yt-1 )
Used when trend has a constant Series Dataamount of change
Yt = a + b•T, where
Yt are the actual observations and
T is a numerical time variable
Used when trend is a constant percentage rate
Log Yt = a + b•T,
where b is the continuously compounded growth rate3. Linear and 4. Constant growth rate
Linear Trend Growth Uses a Semi-log Regression
Yt+1 = [Yt + Yt-1 + Yt-2]/3
Direction of sales can be indicated by other variables.
Motor Control Sales
Index of Capital Goods
Example: Index of Capital Goods is a “leading indicator”
There are also lagging indicators and coincident indicators
Common Survey Problems
New Products have NO
historical data — Surveys
can assess interest in new
The average forecast from several experts is a Consensus Forecast.
yt = a + byt-1 + et