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Foundations for Forecasting

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

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Foundations for Forecasting

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  1. Foundations for Forecasting Basic Concepts

  2. Basic Part of a Forecast • Level • Growth • Uncertainty

  3. Additive Model

  4. Multiplicative Model

  5. 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 comparisons • Components • Consumption • Investment • Government purchases • Net exports (exports – imports)

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

  7. Forecasts for GDP • Last observation • Second quarter of 2013 • $15,681.0 billion • Estimate of billion dollar increase/decrease • $100 billion • Forecast: $15,681.0 + $100 = $15,781.0 • Estimate of percentage change • 0.6% • Forecast: $15,681.0 x (1 + 0.006) = $15,775.1

  8. 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

  9. Change Current observation minus previous observation

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

  11. Percentage Change Change from previous period divided by previous observation

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

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

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

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

  16. Alternative Forms Multiplicative: Additive:

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