ECONOMIC FORECASTING.   Term Paper ID:21580 Click to get this paper

Essay Subject: Business cycles, short- & long-term, techniques (judgmental, econometric, indicator-based), productivity & consumption.... More...

8 Pages / 1800 Words 6 sources, 11 Citations, APA Format $32.00 Return to List of Papers

Paper Abstract: Business cycles, short- & long-term, techniques (judgmental, econometric, indicator-based), productivity & consumption. Paper Introduction: Economic forecasting has long been an area of interest because of its connection with high finance, fortunes won and lost and the criticality of economic trends for the social and political welfare of the country. Numerous public and private organizations are devoted to the production of regular economic forecasts, and heavily funded research projects seek more accurate and reliable models on which to base these forecasts. While much attention is focused on the area of economic forecasting, and numerous computerized models have been developed to predict economic performance, the reliability and accuracy of these models has come into question, in large part because of the importance of the economic forecast to everyday activities. This research examines the business cycle, the current basis of economic forecasting, and short and long-term methodologies of forec Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Econometric modeling emerged during 195 s from earlier attempts todescribe the entire economy as a set of mathematical equations. In one method, thefocus is on the capacity of the economic system to supply the goods andservices that make up the gross national product. These errorscan be dramatic. What is critical for long-term forecasting is the anticipationof changes in the overall economic structure (Ascher, 1978, p. ReferencesAscher, W. So long as this consideration is understood when the models areevaluated, the models can continue to serve the purpose of explaining orpredicting common economic events. Boston: Johns Hopkins University Press.Chase, C. One ofthe foremost criticisms is that many econometric models use a Keynesianapproach, with the result that there is a common family of models that usethe same variables in similar relationships. However, as various models areimplemented and executed, they are sometimes abandoned if they fail topredict an event which has a strong effect on the economy. Research in this area is likely to continue because of the interest inthe implications of accurately being able to predict the national andinternational economies. During the depression ofthe 193 s, 26 percent of the corporations in one group analyzed by theNational Bureau of Economic Research had rising profits (Dauten &Valentine, 1968, p. There are two types of equations used in econometric modeling:identity equations, which express relationships that are true bydefinition, and behavior equations, which express empirical propositions onhow the economy behaves. Beyond these problems, there are noclearly defined rules for projecting productivity. Given the close tradingrelationships between these two countries and the United States, it mightbe expected that a downturn in one trading partner's fortunes would affectthe others, as well ((Dauten & Valentine, 1968, p. Another criticism of econometric models is the appropriate size ofmodels. The indicators approach to forecasting is based on the premise thatinteraction among different aspects of economic activity are consistentenough to establish regular sequences of economic events. 6 ). In order to link productivity to GNP, forecasters must also projectthe size of the working force, which requires an accurate demographic andsocial forecast. A procedure for predicting recessions with leading indicators. Labor market analysis became popular and was used during World WarII to predict the postwar economy, but it too was abandoned when thedepression it predicted in the post-war years did not happen. Larger models, which have morevariables and more equations are generally held to be more completedescriptors of an entire economic system. The consumption approach may break down the demand components in anumber of ways. Highly organizedcountries were likely to have highly organized business cycles, with cyclesoccurring at like times in Western Europe and the United States. 6 ). Journal of Business Forecasting, 12, 26-28.Dauten, C. The use and prevalence of business cycles has given rise to thepractice of economic forecasting, which attempts to predict the businesscycles and significant economic events. This lack of uniformity in international business cycles continuedafter World War II, with the United States experiencing more and deeperrecessions than its European counterparts. There are two types of economic forecasts that are generallydeveloped: short-term (less than two years) and long-term (more than twoyears) (Zarnowitz & Braun, 1993, p. The businesscycle indicators developed by the National Bureau of Economic Research arewidely used. The question that remains, then, is the effect that forecaststhemselves have on the future performance of an economy, and whether aforecast predicting a recession or a recovery may not be self-fulfillingbecause of the perceptions it creates, as well as the information it usesor accuracy it may represent. Understanding the gap between theory and practice. Short-term forecasting is usedextensively to making immediate business and economic policy decisions.Long-term forecasting enters into long-range corporate and governmentalplanning, and serves as a basis for the prediction of other trends.Although econometric models can be used for both long and short-termforecasting, the traditional approaches to predicting economic behaviorvaries depending on the time frame. The most significant drawback to the judgemental approach isthat there is no real way to determine what has gone wrong if the methodfails, and thus it is difficult to come up with remedial steps that can betaken to make the method work better in the future. The performance of short-termforecasting is analyzed with attention to the contributions of differentmethods, while long-term economic forecasting is evaluated with a greateremphasis on the overall levels of accuracy. This research examines the business cycle, the current basisof economic forecasting, and short and long-term methodologies offorecasting. Such cycles were characterized byexpansion and contraction phases, and conventional wisdom held that suchcycles differed in the length of the cycle, but not in the existence of thecycle overall. Minorcycles did not share this commonality, and the United States was consideredto have had more business cycles than Europe overall, and it was notuncommon for some countries to enter recovery while others remained inrecessionary states. 283). H., & Watson, M. This overlapping ofeconomists using the econometric models, and the overlap of the underlyingphilosophies and assumptions, has caused some critics to question whetherthe models do, in fact, offer distinct or independent judgments. For example, the Harvard ABC curve, which was a precursorof today's leading indicator approach, failed to predict the 1929 stockmarket crash and ensuing depression, and so was abandoned as a widely usedtool. W. In long-term forecasting,these short-term fluctuations need not be accounted for to the same levelof detail. As a result,productivity projections do not necessarily balance out the complexrelationship between capacity and demand. Economic forecasting has long been an area of interest because of itsconnection with high finance, fortunes won and lost and the criticality ofeconomic trends for the social and political welfare of the country.Numerous public and private organizations are devoted to the production ofregular economic forecasts, and heavily funded research projects seek moreaccurate and reliable models on which to base these forecasts. The advent of computers and the availability of large amounts ofcomputing power has made it possible for economic forecasters to developcomplex models designed to accurately predict future economic events andbehavior. There is a danger in abandoning a model simply because of dramaticerrors. Stock, J. Chicago: University of Chicago Press, pp. Leading economic indicators can be determined either theoretically orempirically. Business Cycles, Indicators and Forecasting. However, economic behavior is based not only onempirical information, but also on the perception of how the economy isgoing to perform. 95-153.Zarnowitz, V., & Braun, P. The success offorecasting with leading indicators depends on the uniformity of thedynamics of business cycles from one point in time to another (Stock &Watson, 1993, p. (1968). A majority of the earlier modelswere set up merely to demonstrate that such modeling not only could bedone, but that these models would have real-world applications. Business cycles and forecasting. Models are designed to predict general behavior, not radicalchange. Chicago: South-Western Publishing Company.Peters, J. 21). Forecasting. While muchattention is focused on the area of economic forecasting, and numerouscomputerized models have been developed to predict economic performance,the reliability and accuracy of these models has come into question, inlarge part because of the importance of the economic forecast to everydayactivities. (1993). For example, disposable income may be related toconsumption, but the exact nature of that relationship is left to thebehavioral equation. H., & Watson, M. W., eds. Chicago: University of Chicago Press, pp. Econometricmodeling, which has gained recent favor, is experiencing strong criticismbecause it failed to predict the economic downturns of the 197 s (Ascher,1978, p. Somecritics have interpreted those early simplistic models as offeringblueprints for all econometric models, and suggest that as the modelsthemselves become cumbersome, the ability of non-economists to understandand interpret them also is lost (Chase, 1993, p. Criticism of the econometric model come from various sources. 147). These may include by broad sector or by specific productand category. These innovations notwithstanding, however, economic forecastingremains a controversial subject that has yet to settle on a single methodfor either short-term or long-term forecasting. W. W., eds. Each behavioral equation, in turn, has three aspects: the nature ofthe variables, the form of the equation, and the values for the constantsin the equation. Despite the observations that business cycles are not universal and donot occur with uniformity throughout a single economy, let alone theinternational market, they are convenient measures of economic activitywhich remain popular because of their simplicity (Ascher, 1978, p. The judgemental approach holds that individuals are the mostsensitive and comprehensive evaluator of the diverse evidence as to what islikely to occur in the future. For example, if the economy enters a recovery phaseafter being in a recession, the Fed may be expected to raise interest ratesto keep inflation down. Since World War II, long-term forecasting has focused on twoapproaches, both of which use component breakdowns. Twenty-two years of the NBER-ASA quarterly economic outlook surveys. In this way, thepredictive value of a model can be lost since the model is generally chosento "fit" the particular period in question. On forecasting the future. Even the business cycle concept with regard to the United States isnot considered an all-pervasive event. A., & Valentine, L. Business Cycles, Indicators and Forecasting. Until the 197 s, it was widely accepted that the American economypassed through business cycles. In addition, the level of unemployment must be forecast,and the number of hours worked. Parameters are generally estimated by determiningstatistically which values for the model's parameters allow the model toconform most closely to some set of historical data. Changes inleading indicators must also precede these shifts in other trends byuniform intervals from one business cycle to another. Regardlessof the demand component examined, the forecast must still project thecomponents, which is a large and intricate undertaking. For example, the results of the operation of some companies runcounter to the main stream of profits or losses. (1993, Spring). The limitation of this method is that notall conclusions that are reached can be based on pure logic, but insteadinvolve (as its name implies) the judgment of the individual making theanalysis. Business cycles, according to traditional thinking, affected allcountries that were based on free-market principles. 65). If thesesequences are regular, some events, such as increases or decreases ininventories, the number of new businesses formed, or changes in the moneysupply, will consistently signal future changes in trends in GNP,employment, inflation and other related economic events. In anticipation of this, investors and managersare likely to change their behavior, all because of perceptions, longbefore any actual action takes place. (1993). Canada and Japan shareddownturns in their economies often at the same time as the United States,although the downturns were not as pronounced. M. There are three commonly used short-term economic froecastingtechniques: judgmental approach, econometric modeling, and the indicatorapproach. H., & Watson, M. From 1854 to the mid-196 s, analysts generally consideredthat business cycles varied in length from between one and eight years,with the most common length being three years and the average length beingfour (Dauten & Valentine, 1968, p. (1993, November). 85). Therelationships can be complex and convoluted, and the advent of the computerhas made their computations much easier and less time consuming than wheneconometric models were first introduced. 39). Many large corporations and governmental units have their ownforecasting staffs which develop specialized projections relevant to theiractivities and resource needs. If this does notoccur, the indicators may herald a significant economic change, but beunable to predict when the change is due to occur. TheKeynesian models emphasize fiscal policy in the form of governmentexpenditures to establish demand, production, employment and othercategories of economic activity, and put monetary expansion to the side inconsideration of its effect on economic forces (Peters, 1993, p. 21-22.Stock, J. Management Decision, pp. In thisapproach, plausible relationships among various economic components, suchas prices, wages and investment levels, relate time-specific levels withone another in order to reproduce past patterns of economic progress. In some studies, time series do nothave regular cyclical movements while others were found to reach their peakevery month. To keep track of how demands in one sector create demands inanother, connections are represented by a matrix which puts therequirements for each sector against the outputs of the others. The size of a model represents its elaborateness and intricacies,and brings up the issue of simplification versus complication, since one ofthe goals of forecasting is to have a model that can be understood by non-economists (most notably policy makers). Short-term economic forecasting not only generates a great deal ofinterest among business professionals and government administrators, butalso generates a large amount of business for companies specializing inthis area. 11-84. An example of the identity equation is "totalspending equals government spending plus nongovernment spending," while anexample of a behavioral equation is "consumption equals some constantmultiplied by disposable income" (Ascher, 1978, p. Long-term economic forecasting differs from short-term forecasting inthat short-term trends depend on the capacity to understand the intricaciesand linkages of the current economic structure. 27). 281). The task here is toproject productivity, which is assumed to increase at a predictable rate.The other approaches focuses on the demand side of the equation, and toforecast GNP as a consumption function, projecting the demand for goods andservices. (1978). During a period of expansion, not all time series componentsexpand; during a recessionary period, not all time series componentscontract. 279). Economic theories of the business cycle dynamic can yieldpropositions as to which events regularly precede others. Stock, J. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.