1. MANAGERIAL ECONOMICS 12th EditionBy
Mark Hirschey
© 2009, 2006 South-Western, a part of Cengage Learning

2. © 2009, 2006 South-Western, a part of Cengage Learning
Forecasting
Chapter 6
© 2009, 2006 South-Western, a part of Cengage Learning

3. © 2009, 2006 South-Western, a part of Cengage Learning
Chapter 6 OVERVIEW
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

4. © 2009, 2006 South-Western, a part of Cengage Learning
Chapter 6 KEY CONCEPTS
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
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

5. Forecasting Applications
Macroeconomic Applications
Predictions of economic activity at the national or international level, e.g., inflation or employment.
Microeconomic Applications
Predictions of company and industry performance, e.g., business profits.
Forecast Techniques
Qualitative analysis.
Trend analysis and projection.
Exponential smoothing.
Econometric methods.
© 2009, 2006 South-Western, a part of Cengage Learning

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Qualitative Analysis
Expert Opinion
Informed personal insight is always useful.
Panel consensus reconciles different views.
Delphi method seeks informed consensus.
Survey Techniques
Random samples give population profile.
Stratified samples give detailed profiles of population segments.
© 2009, 2006 South-Western, a part of Cengage Learning

7. Trend Analysis and Projection
Secular trends show fundamental patterns of growth or decline.
Constant unit growth is linear.
Constant percentage growth is exponential.
Cyclical fluctuations show variation according to macroeconomic conditions.
Cyclical normal goods have εI > 1, e.g., housing.
Seasonal variation due to weather or custom is often important, e.g., summer demand for soda.
Random variation can be notable.
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Business Cycle
The Business Cycle is a rhythmic pattern of economic expansion and contraction.
Economic indicators help forecast the economy.
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

12. Exponential Smoothing
One-parameter Exponential Smoothing
Used to forecast relatively stable activity.
Two-parameter Exponential Smoothing
Used to forecast relatively stable growth.
Three-parameter Exponential Smoothing
Used to forecast irregular growth.
Practical Use of Exponential Smoothing Techniques
© 2009, 2006 South-Western, a part of Cengage Learning

14. Econometric Forecasting
Advantages of Econometric Methods
Models can benefit from economic insight.
Forecast error analysis can improve models.
Single Equation Models
Show how Y depends on X variables.
Multiple-equation Systems
Show how many Y variables depend on several X variables.
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15. Judging Forecast Reliability
Tests of Predictive Capability
Consistency between test and forecast sample suggests predictive accuracy.
Correlation Analysis
High correlation indicates predictive accuracy.
Sample Mean Forecast Error Analysis
Low average forecast error points to predictive accuracy.
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16. Choosing the Best Forecast Technique
Data Requirements
Scarce data mandates use of simple forecast methods.
Complex methods require extensive data.
Time Horizon Problems
Short-run versus long-run.
Role of Judgment
Everybody forecasts.
Better forecasts are useful.
© 2009, 2006 South-Western, a part of Cengage Learning