Foundations for Forecasting Basic Concepts. Basic Part of a Forecast Level Growth Uncertainty.

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Presentation transcript:

Foundations for Forecasting Basic Concepts

Basic Part of a Forecast Level Growth Uncertainty

Additive Model

Multiplicative Model

Forecasting Example: Gross Domestic Product Value of final goods and services produced in an economy during a specified period of time Measures the size of the economy and facilitates comparisonscomparisons Components Consumption Investment Government purchases Net exports (exports – imports)

Real Gross Domestic Product (GDPC1) Possibilities at Federal Reserve Economic Data web site (FRED)FRED Nominal versus real Seasonally adjusted versus not seasonally adjusted Frequency of data Data Manipulation Linear level or no manipulation Change Rate of Change

Forecasts for GDP Last observation Third quarter of 2014 $16,205.6 billion Estimate of billion dollar increase/decrease $100 billion Forecast: $16, $100 = $16,305.6 Estimate of percentage change 0.6% Forecast: $16,205.6 x ( ) = $16,302.83

Vertical Axis Linear level in original units Change from previous period Change from a year ago Percentage change Percentage change from a year ago Compounded annual percentage change Continuously compounded percentage change Continuously compounded annual percentage change Index

Change Current observation minus previous observation

Change from Previous Year Current observation minus observation from a year ago

Percentage Change Change from previous period divided by previous observation

Percentage Change from Year Ago Change from year ago divided by observation from a year ago

Compounded Annual Change Ratio of consecutive observations raised to the power of the number of observations per year.

Continuously Compounded Rate of Change Natural logarithm of the ratio of consecutive observations

Continuously Compounded Annual Rate of Change Natural logarithm of the ratio of consecutive observations multiplied by the number of observations per year

Alternative Forms Multiplicative: Additive: