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Economic forecasting

1. Economic forecasting:

It is forecasting the general economic conditions. Like boom or depression, upswing or downswing of the economy. Corresponding to these forecasts, sales and revenues of the business go up or down, In case of depression, timely forecast can prevent the firms from incurring losses.

Various techniques of economic forecasting are: (a) Extrapolation (b) Leads and lags (C) Econometrics.

(a). Extrapolation:

It is the continuity of past into future. Future is considered to be projection of the past. For example, if sales of a company are increasing every year at the rate of 12% and sales for the current year are Rs. 1 lakh, the forecast of sales in the next year will be Rs. one lakh and twelve thousand. These forecasts hold good unless there is an unpredictable change in the economic environment.

(b) Leads and Lags:

Some factors/ indicators precede change in the economic environment; decrease/increase in the stock market indices for example, is and indication of downswing/ upswing in the economy. These are known as lead indicators.

Some indicators succeed economic cycles. For example, if the economy is experiencing depression, manufacturing activity will slow down, manufacturer will not borrow from the banks, interest rates will go down and consumer spending will also go down. These are the lag indicators.

(c) Econometrics:

It applies statistical models to solve business problems. The impact of different variables on the variable sought to be analyzed is studied and forecasts are made. For example, if a firm wants to know the impact of changes in production policy or advertising expenditure on sales, it can be found through techniques of econometrics. This model can work under different sets of assumptions; the impact of future certainties and uncertainties can be studied and results can be predicted.

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