Managerial Economics: Forecasting Dr.

Heman Lohano

Q:
Suppose you are an analyst for a firm producing cars, and want to forecast the sale of cars for
four quarters of the next year. The sales are subject to seasonal variation and also have a trend
over time. For forecasting, the following model is specified:

Yt = a + b t + c D2 + d D3 + e D4
where
t is the time index for the month (t = 1, 2,…, 96)

Yt = Number of cars sold in month t

D2 = 1 if t is a month in quarter II (Oct – Dec); 0 otherwise

D3 = 1 if t is a month in quarter III (Jan – Mar); 0 otherwise

D4 = 1 if t is a month in quarter IV (Apr – June); 0 otherwise

Using monthly data for the past eight years (Jul 2010 – Jun 2018), the above model is
estimated by OLS method as:
Dependent Variable: Number of Cars
Included observations: 96

Variable Coefficient Std. Error t-Statistic Prob.

Constant 7680.000 851.814 9.015 0.0000

t 30.000 11.450 2.620 0.0103
D2 -100.000 50.001 -2.000 0.0495
D3 200.000 99.000 2.020 0.0489
D4 200.000 76.336 2.625 0.0101

R-squared 0.559269 Mean dependent var 9628.813

F-statistic 4.309779
Prob(F-statistic) 0.003077

Using the estimates from the above table, forecast the number of cars expected to be
sold in the next four quarters: quarter I, quarter II, quarter III, and quarter IV.

Note: The above model can be used to compute the expected number of cars for each of 12
months, which can be used for computing quarterly sale.
Key:

The next 12 months are: t = 97, 98, …, 108. The expected number of cars for any month can
be computed as follows:

Ŷt = 7680 + 30 t – 100D2 + 200D3 + 200D4

Quarterly forecast is the sum of the monthly forecasts for the months in each quarter.

Quarter Month t D2 D3 D4 Monthly Quarterly

Forecast Forecast
Jul 97 0 0 0 10590
Aug 98 0 0 0 10620
1 Sep 99 0 0 0 10650 31860
Oct 100 1 0 0 10580
Nov 101 1 0 0 10610
2 Dec 102 1 0 0 10640 31830
Jan 103 0 1 0 10970
Feb 104 0 1 0 11000
3 Mar 105 0 1 0 11030 33000
Apr 106 0 0 1 11060
May 107 0 0 1 11090
4 Jun 108 0 0 1 11120 33270