economic forecasting

1. TOPIC I. FUNDAMENTALS
OF ECONOMIC
FORECASTING
by Tetiana Kuzhda

2. What will be covered?
• What is forecasting?
• What is economic forecasting?
• Features of forecasting
• Significance of forecasting
• Limitations of forecasting
• Forecast types
• Forecasting methods

3. Forecast definitions
• Forecast is a likely, scientifically well-grounded
opinion about possible state of
the events, objects or processes in the
future.
• Forecast is a statement of the expected
outcome of a given set of events or data.
• Economic forecast is a statement of
future developments in business such as
sales, expenditures, profits, etc.

4. What is forecasting?
• Forecasting is a process of making statements
about events whose actual outcomes (typically)
have not yet been observed.
• Forecasting is a process of predicting or
estimating the future based on past and present
data.
• Economic Forecasting is a process of making
forecasts based on analysis of past trends and
regularities of the economic processes, activities
and data.

5. Steps of Economic Forecasting
“The forecast”
Step 7. Make the forecast
Step 6. Forecast estimation
Step 5 Select the forecasting model
Step 4 Data collection
Step 3 Set the time limits of the forecast
Step 2 Identify the items to be forecasted
Step 1 Determine the use of the forecast

6. Step 1. Determine the use of the
forecast
The use of the forecast is caused by the
following:
• who needs the forecast
• all entities (organizations, companies,
enterprises, etc.) operate in the
atmosphere of uncertainty
• decisions to be made affect future of the
organization.

7. Step 2. Identify the items to be
forecasted
• economic processes (for example, inflation,
demand, supply)
• company activities (for example, price, profit,
income, costs)
• national economics (for example, gross
domestic product, national income, export,
import, external debt)
• social processes (for example, wage, salary,
bonus fund, incentive fund, overtime payments)

8. Step 3. Set the time limits (time horizon)
of the forecast
• short-term forecast is the forecast for
week, month, quarter and year
• medium-term forecast is the forecast from
1 to 3 years
• long-term forecast is the forecast over 3
years

9. Step 4. Data collection
is a term used to describe a process of preparing and collecting
statistical data necessary to forecasting
Timely
Reliable Accurate
Meaningful
Written
Easy to use
Interrelated

10. Data sources
Primary data include:
• internal company information (for example, data on the costs
of raw materials, costs of production, prices, income, net
profit, sales and etc.)
• external information obtained from consumers, suppliers,
distributors or economists-experts resulting personal
interviews.
Secondary data include:
• data collected by government statistics, private
organizations, specialized on collecting statistical data (for
example, consulting agencies)
• data obtained resulting censuses, statistical surveys, and
organizational records
• computer databases can be classified according to types of
content: analytical, full-text, numeric, images, etc.

11. Step 5. Select the forecasting model
Economic and statistical models can be:
• simple models help to make forecast
depending on one factor (time)
• complex models help to make forecast
depending on many factors

12. Step 6. Forecast estimation
is a process of its checking (validating) on
goodness of fit and statistical significance
based on statistical coefficients
General rule: if the forecasting model is
reliable and statistical significant, the
forecast is accurate.

13. Step 7. Make the forecast
means to calculate the quantitative forecast
(using forecasting techniques and
methods) that is a basis for making
decisions by managers

14. Characteristics or features of
forecasting
• forecasting is concerned with future
events;
• it shows the probability of happening of
future events;
• it analysis past and present data;
• it uses statistical tools and techniques;
• it uses personal observations.

15. Significance or importance of
forecasting
• Forecasting provides relevant and reliable
information about the past and present
events and the likely future events.
• It gives confidence to the managers for
making important decisions.
• It keeps managers active and alert to face
the challenges of future events and the
changes in the environment.

16. Limitations of forecasting
• 1) Collection and analysis of data about the past, present
and future involve a lot of time and money. Therefore,
managers have to balance the cost of forecasting with its
benefits.
• 2) Forecasting can only estimate the future events. It
cannot guarantee that these events will happen in the
future. Long-term forecasts will be less accurate than
short-term forecast.
• 3) Forecasting is based on past events (data). However,
history may not repeat itself at all times.
• 4) Forecasting requires proper judgment and managers
skills. Forecasts may go wrong due to bad judgment and
skills on the part of some of the managers. Therefore,
forecasts are subject to human error.

17. Limitations of forecasting
• 5) Forecast always contains some mistake; it presence in the
forecast is objective and can not be eliminated by using the
most advanced calculation techniques and methods.
• 6) All types of forecasting methods are founded on the
statistical data processing by special methods (for example,
extrapolation). In this case, forecast is based on identified
trends and data in the past.
• 7) There is no universal forecasting method which can provide
high quality of forecast. Selection of forecasting method
should be based on detailed analysis of the current situation
both inside the economic entity and beyond.
• 8) Any forecasting method is based on certain assumptions
that can simplify the economic reality. If these assumptions
are wrong, the forecasting will be wrong and on the contrary, if
these assumptions are right, the forecasting will be accurate.

18. Forecast types
1. Economic forecast is a statement of
predicting the movements of the economy. It
includes
• Microeconomic forecasts are designed to predict
the effects of change at the level of an industry or a
firm.
• Macroeconomic forecasts are designed to predict
the course of the aggregate economy and
concentrate on variables such as interest rates, the
rate of inflation, and the rate of unemployment.

19. Microeconomic forecast types
Sales forecast is used to predict how many people will
want to buy a product or service from a company in a
specific period. Sales forecasting is used in business
planning, management decisions and marketing.
Demand forecast is the activity of estimating the quantity
of a product or service that consumers will purchase.
Demand forecasting may be used in making pricing
decisions, in assessing future capacity requirements,
or in making decisions on whether to enter a new
market.
Revenue forecast is used to predict what money will be
made by meeting the sales forecast. The revenue
forecast is an assessment of the profit that a
company might make providing a financial baseline to
measure achievement of business strategy.

20. Forecast types
2. Technological forecast is a statement of
predicting the future state of technology and
the extent to its use
3. Political forecast is involved in the
investigation and analysis of all areas of
election
4. Demographic forecast is a statement of
predicting the migration of the population,
reproduction of labour by age composition,
employment of working population

21. Forecast types by time horizon
• Short-term forecast is used in development
of monthly, quarterly and annual plans
• Job scheduling, worker assignments
• Medium-term forecast is used to develop
the tactical plans (1-3 years)
• Sales/production planning
• Long-term forecast is used to develop the
strategic plans (over 3 years)
• New product planning

22. Forecast types
• Spot (or point) forecast includes a single
predicted value. For example, after 6
months the price of a given product will
grow by 10%.
• Interval forecast is used to predict the
future, which offered a range, the range of
predicted values. For example, after 6
months the price of a given product will
grow by 10-15%.

23. Forecast types
• Qualitative forecast is based on
subjective methods, intuition and
managerial experience
• Quantitative forecast is based on
mathematical tools, time series
methods and causal models

24. Forecasting methods
are the set of techniques and ways of external and internal
data analysis to make conclusion about possible state of
the events, objects or processes in the future.
• Qualitative or expert methods are based on expert
knowledge, competence and personal experience in the
certain sphere of activity (for example, sphere of
industry, branch of agriculture or field of law).
• Quantitative methods are based on mathematical tools
(formulas and equations). These methods include time
series methods and causal / econometric forecasting
methods.

25. Example:
based on statistics on exports and imports, find the
trade balance forecasts for 2014, if the predicted
growth compared to 2013 for products of oil
industry is 12,5%, for products of metal
processing industry is 10,5%, for products of
machine building industry is 11,2%, for products
of dairy industry is 4,5%, for products of textile
industry is 3%, for products of footwear industry
is 6%; the predicted decline compared to 2013
for products of electronic industry is 5%, for
products of heavy industry is 3,5%, for products
of timber industry is 1,5%.

26. Table 1 – Statistics on exports and imports

27. Table 2 – Calculation results

28. Table 3 – Calculation results