Forecasting Techniques

Several methods are available for forecasting economic variables. They range from the very naïve that require little effort to very sophisticated ones that are very costly in terms of time and effort. Some forecasting techniques are basically qualitative, while others are quantitative. Some are based on examining only past values of the data series to forecast its future based on a great deal of additional data and relationships some are performed by e firm itself, other’s are purchased from consulting firms. In general, forecasting techniques can be divided into following two broad categories.
It is impossible to argue that any one of these forecasting techniques is superior to others. Each method has its strengths and weakness. The best forecast methodology for a particular task depends on the nature of the specific forecasting problem.
Therefore, choice of technique depends upon a number of important factors. The important factors must be considered for appropriate methodology are- distance into the future, the lead time available for making decisions, the level of accuracy required, the quality of data available for analysis, deterministic nature of forecast relations and the cost and benefits associated with the forecasting problem.
Forecasting methodology such as trend analysis, market experiments, customer surveys and the leading indicator are more useful for short term forecasts, while others, such as complex econometric models, input-output methods, are more useful for long-term forecasting of one year or longer. In general, the greater the level of accuracy required and the more complex the relationship to be forecasted, the more sophisticated and expensive will be the forecasting exercise. By considering the advantages and limitations of each forecasting technique, managers can choose the appropriate method or combinations of methods to generate required results. In this chapter we shall examine the advantages and limitations of the each forecasting technique presented in the chart.