Foundations for Forecasting

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Foundations for Forecasting - PowerPoint PPT Presentation

Foundations for Forecasting. Basic Concepts. Basic Part of a Forecast. Level Growth Uncertainty. Additive Model. Multiplicative Model. Forecasting Example: Gross Domestic Product. Value of final goods and services produced in an economy during a specified period of time

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Presentation Transcript

Foundations for Forecasting

Basic Concepts

Basic Part of a Forecast
• Level
• Growth
• Uncertainty
Forecasting Example: Gross Domestic Product
• Value of final goods and services produced in an economy during a specified period of time
• Measures the size of the economy and facilitates comparisons
• Components
• Consumption
• Investment
• Government purchases
• Net exports (exports – imports)
Real Gross Domestic Product (GDPC1)
• Possibilities at Federal Reserve Economic Data web site (FRED)
• Nominal versus real
• Frequency of data
• Data Manipulation
• Linear level or no manipulation
• Change
• Rate of Change
Forecasts for GDP
• Last observation
• Second quarter of 2013
• \$15,681.0 billion
• Estimate of billion dollar increase/decrease
• \$100 billion
• Forecast: \$15,681.0 + \$100 = \$15,781.0
• Estimate of percentage change
• 0.6%
• Forecast: \$15,681.0 x (1 + 0.006) = \$15,775.1
Vertical Axis
• Linear level in original units
• Change from previous period
• Change from a year ago
• Percentage change
• Percentage change from a year ago
• Compounded annual percentage change
• Continuously compounded percentage change
• Continuously compounded annual percentage change
• Index
Change

Current observation minus previous observation

Change from Previous Year

Current observation minus observation from a year ago

Percentage Change

Change from previous period divided by previous observation

Percentage Change from Year Ago

Change from year ago divided by observation from a year ago

Compounded Annual Change

Ratio of consecutive observations raised to the power

of the number of observations per year.

Continuously Compounded Rate of Change

Natural logarithm of the ratio of consecutive observations

Continuously Compounded Annual Rate of Change

Natural logarithm of the ratio of consecutive observationsmultiplied by the number of observations per year

Alternative Forms

Multiplicative: