MANAGERIAL ECONOMICS
12th Edition
By
Mark Hirschey
© 2009, 2006 South-Western, a
part of Cengage Learning
Forecasting
Chapter 6
© 2009, 2006 South-Western, a
part of Cengage Learning
Chapter 6
OVERVIEW
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Forecasting Applications
Qualitative Analysis
Trend Analysis and Projection
Business Cycle
Exponential Smoothing
Econometric Forecasting
Judging Forecast Reliability
Choosing the Best Forecast Technique
© 2009, 2006 South-Western, a
part of Cengage Learning
Chapter 6
KEY CONCEPTS
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macroeconomic forecasting
microeconomic forecasting
qualitative analysis
personal insight
panel consensus
delphi method
survey techniques
trend analysis
secular trend
cyclical fluctuation
seasonality
irregular or random influences
linear trend analysis
growth trend analysis
business cycle
economic indicators
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composite index
economic recession
economic expansion
exponential smoothing
one-parameter (simple) exponential
smoothing
two-parameter (Holt) exponential
smoothing
three-parameter (Winters) exponential
smoothing
econometric methods
identities
behavioral equations
forecast reliability
test group
forecast group
sample mean forecast error
© 2009, 2006 South-Western, a
part of Cengage Learning
Forecasting Applications
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Macroeconomic Applications
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Microeconomic Applications
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Predictions of economic activity at the national or
international level, e.g., inflation or employment.
Predictions of company and industry performance,
e.g., business profits.
Forecast Techniques
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Qualitative analysis.
Trend analysis and projection.
Exponential smoothing.
Econometric methods.
© 2009, 2006 South-Western, a
part of Cengage Learning
Qualitative Analysis
 Expert
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Informed personal insight is always useful.
Panel consensus reconciles different views.
Delphi method seeks informed consensus.
 Survey
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Opinion
Techniques
Random samples give population profile.
Stratified samples give detailed profiles of
population segments.
© 2009, 2006 South-Western, a
part of Cengage Learning
Trend Analysis and Projection
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Secular trends show fundamental patterns of
growth or decline.
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Constant unit growth is linear.
Constant percentage growth is exponential.
Cyclical fluctuations show variation according to
macroeconomic conditions.
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Cyclical normal goods have εI > 1, e.g., housing.
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Seasonal variation due to weather or custom is
often important, e.g., summer demand for soda.
 Random variation can be notable.
© 2009, 2006 South-Western, a
part of Cengage Learning
Business Cycle
 The
Business Cycle is a rhythmic pattern
of economic expansion and contraction.
 Economic indicators help forecast the
economy.
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Leading indicators, e.g., stock prices.
Coincident indicators, e.g., production.
Lagging indicators, e.g., unemployment.
 Economic
recessions are periods of
declining economic activity.
© 2009, 2006 South-Western, a
part of Cengage Learning
Exponential Smoothing
 One-parameter
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Used to forecast relatively stable activity.
 Two-parameter
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Exponential Smoothing
Exponential Smoothing
Used to forecast relatively stable growth.
 Three-parameter
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Exponential Smoothing
Used to forecast irregular growth.
 Practical
Use of Exponential Smoothing
Techniques
© 2009, 2006 South-Western, a
part of Cengage Learning
Econometric Forecasting
 Advantages
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Models can benefit from economic insight.
Forecast error analysis can improve models.
 Single
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of Econometric Methods
Equation Models
Show how Y depends on X variables.
 Multiple-equation
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Systems
Show how many Y variables depend on
several X variables.
© 2009, 2006 South-Western, a
part of Cengage Learning
Judging Forecast Reliability
 Tests
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of Predictive Capability
Consistency between test and forecast
sample suggests predictive accuracy.
 Correlation Analysis
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High correlation indicates predictive accuracy.
 Sample
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Mean Forecast Error Analysis
Low average forecast error points to
predictive accuracy.
© 2009, 2006 South-Western, a
part of Cengage Learning
Choosing the Best Forecast
Technique
 Data
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Scarce data mandates use of simple forecast
methods.
Complex methods require extensive data.
 Time
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Horizon Problems
Short-run versus long-run.
 Role
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Requirements
of Judgment
Everybody forecasts.
Better forecasts are useful.
© 2009, 2006 South-Western, a
part of Cengage Learning