GROUP 5

ECONOMIC FORECASTING

Members:

Alarez, Hazel C.

Marbella, Mayette

Napoles, Manelyn Joy

Zabala, Lester
 ECONOMIC FORECASTING

- Is the process of attempting to predict the future condition of the economy using a
combination of important and widely followed indicators.

- Managers of business need a quantified target to plan for future operating activities.

WHY FORECASTING IS USEFUL?

- Forecasting helps businesses to make adjustments in their operations that reflect observed
changes or anticipated changes in the business environment. It tells you the future environment in
which you may operate.

COMMON TYPES OF FORECASTING PROBLEMS IN MANAGERIAL ECONOMICS

1. MACROECONOMIC FORECAST PROBLEMS

- Macroeconomic predictions are important because they are used by businesses and individuals
to make day-to-day operating decisions and long term planning decisions. If interest rate are projected
to rise, homeowners may rush to refinance fixed-rate mortgages, while businesses float new bonds and
stocks offering refinance existing debt or take advantage of investment opportunities.

- When such predictions are accurate significant cost savings or revenue gains becomes possible.

- When such predictions are inaccurate, higher costs and lost marketing opportunities occur.

2. MICROECONOMIC FORECAST PROBLEMS

-In contrast, microeconomic forecasting involves the prediction of disaggregate economic data
as industry, firms, plant or product level.

- Trained and experienced analyst often find it easier to accurately forecast microeconomic
trends, such as the demand for new cars, than macroeconomic trends such as, GDP growth.

3. PROBLEM OF CHANGING EXPECTATIONS

- The subtle problem of changing expectations bedevils both macro and microeconomics.

If business purchasing agents are optimistic about future trends in the economy and boost
inventories in anticipation of surging customer demand, the resulting inventory can build up itself to
contribute economic growth. Conversely, if purchasing agents fear an economic downturn and cut by on
orders and inventory growth, they themselves can be a main contributor to any resulting economic
downturn. the expectations of purchasing agents and other managers can become a self-fulfilling
prophecy because the macroeconomic environment represents the investment and spending decisions
of business, government and the public

- It is vital for managers to appreciate the link between economic expectations and realizations
and to be wary of the potential for forecast bias.

4. DATA QUALITY PROBLEMS

- Accurate forecasts require pertinent data that are current, complete and free from error,
almost everyone have heard the familiar warning about the relation between data quality and forecast
accuracy

- In addition, to carefully considering the quality of data used to generate forecasts, the quantity
available data is also important.

- The more data that can be subject to analysis the better.

Reporter: Hazel C. Alvarez

 QUALITATIVE ANALYSIS
It is an intuitive judgmental approach to forecasting. It can be useful if it
allows for the systematic collection and organization of data derived from
unbiased, informed opinion.

Forms Of Qualitative Analysis

1. Personal Insights
 In which individual uses personal or company experience as a basis for
developing future expectations. Although this approach is subjective, the
reasoned judgment of informed individuals often provide valuable
insights.
2. Panel Consensus
 Relies on the informed opinion of several individuals. The Panel
Consensus Method assumes that several experts can arrived at forecasts
that are superior to those that individuals generate.
3. Delphi Method
 Responses from a panel of experts are analyzed by independent party to
elicit a consensus opinion.

Survey Techniques

 That skillfully use interviews or mailed questionnaires constitute another

important forecasting tool, especially for short-term projections.

TREND ANALYSIS
Based on the premise that economic performance follows an established
pattern and that historical data can be used to predict future business activity.

Involves characterizing the historical pattern of an economic variable and

then projecting or forecasting its future path based on past experience.

Trends in Economic Data

Forecasting by trend projection is predicated on the assumption that

historical relationships will continue into the future.
Four Patterns

A. Secular Trend
 Is the long run pattern of increase or decrease in economic data.
B. Cyclical Fluctuation
 Describes the rhythmic variation in economic series that is due to a
pattern of contraction in the overall economy.
C. Seasonality / Seasonal Variation
 Rhythmic annual pattern in sales or profits caused by weather, habit or
social custom.
D. Irregular / Random Influences
 Are unpredictable shocks to the economic system and the pace of
economic activity caused by wars, strikes, natural catastrophes and so on.

Linear Trend Analysis

- Assumes a constant period-by-period unit change in an important

economic variable over time.

A linear relation between firm sales and time, such as the illustrated in
figure, can be written as S1 = a + b x t

Growth Trend Analysis

- Assumes a constant period-by-period percentage change in an important

economic variable over time.
Reporter: Mayette Marbella
 Econometric Methods

- The Econometric Methods make use of statistical tools and economic theories in combination
to estimates the economic variables and to forecast the intended variables.

The econometric methods are comprised of two basic methods, these are:

1. Regression Method

- The regression analysis is the most common method used to forecast the demand for a
product. This method combines the economic theory with statistical tools of estimation. Under the
regression method, the first and the foremost thing is to determine the demand function.

2. Simultaneous Equations Model

- Under simultaneous equation model, demand forecasting involves the estimation of several
simultaneous equations.

JUDGING FORECAST RELIABILITY

Tests of Predictive Capability

- To test predictive capability, a forecast model generated over one sample or period is used to
forecast data for some alternative sample or period. The reliability of a model for predicting firm sales,
such as that shown in Equation, can be tested by examining the relation between forecast and actual
data for years beyond the period over which the forecast model was estimated. However, it is often
desirable to test a forecast model without waiting for new data to become available. In such instances,
one can divide available data into two subsamples, called a test group and a forecast group. The
forecaster estimates a forecasting model using data from the test group and uses the resulting model to
“forecast” the data of interest in the forecast group. A comparison of forecast and actual values can
then be conducted to test the stability of the underlying cost or demand relation

Correlation Analysis

- In analyzing a model’s forecast capability, the correlation between forecast and actual values
is of substantial interest. Sample Mean Forecast Error Analysis Further evaluation of a model’s predictive
capability can be made through consideration of a measure called the sample mean forecast error,
which provides a useful estimate of the average forecast error of the model. It is sometimes called the
root mean squared forecast error and is denoted by the symbol U.

CHOOSING THE BEST FORECAST TECHNIQUES

- Forecasting is the technique of using the historical data to predict the future.
Forecasting is broadly divided into two categories: Qualitative and Quantitative:

Qualitative Techniques

- Qualitative techniques are the ones which apply knowledge of the business, market, product
and customer to make a judgment call on the forecast.

The Delphi method

- is very commonly used in forecasting. A panel of experts is questioned about a situation, and
based on their written opinions, analysis is done to come up with a forecast.

The Market Research method

- is a more systematic and formal way to estimate market sentiment and come up with a
forecast based on various hypotheses.

Panel Consensus techniques

- assume that a group of experts brought together will result in better predictions. Here, there is
no moderation and the panelists themselves come to a conclusion with regards to the forecast.

Preferred Time-Period: 0-3 months

Qualitative techniques work best for a short-term forecast. In cases of long-term forecasting, the market
research method may give better results as compared to the other techniques.

Quantitative Techniques

- Quantitative Techniques use the data gathered over time and use statistical techniques to
come up with a forecast. There are two types of quantitative techniques – Time Series and Causal.

Time Series Forecasting

- For time series forecasting, the historical data is a set of chronologically ordered raw data
points. One way it is different from Causal forecasting is the natural ordering of the data points.

Moving Average (MA)

- Moving average or simple moving average is the simplest way to forecast by calculating an
average of last ‘n periods.

Exponential Smoothing (EA)

 - EA is one of the commonly used techniques where we produce a smoothed time series by
assigning variable weights to the observed data point, depending on how old the data is.

ARIMA (Autoregressive integrated moving average): ARIMA is a statistical technique that makes use of
time series data to predict the future.

X11 Forecasting: X11 is a forecasting technique which was adapted from the US Bureau of Census X-11
Seasonal adjustment program.

Forecast Period: Less than a year

- Time series forecasting techniques work the best for a short- to medium-term forecast for up
to a year.

Causal Forecasting

- Causal forecasting is the technique that assumes that the variable to be forecast has a cause-
effect relationship with one or more other independent variables.

Regression Model

- Regression is one of the most common techniques used to understand a variable relationship
in a dataset.

Econometric Model

- Econometric Model: The econometric modeling technique uses economic variables to forecast
future developments. It relies on the interaction between the economic variables and the internal sales
data.

Leading Indicator Models

- The leading indicator technique uses a combination of regression models and willingness to
buy survey results to identify causation between movement of two time-series variables.

Reporter: Manelyn Joy Napoles