 Different forecasting models or methods

under time-series analysis are as under:

 1.1) Naive Method
 This is the simplest method among forecast
methods of time-series analysis.
 In the naive method, the past period’s (the
most recent one) actual demand is used as a
forecast to predict demand for the next
period.
 It considers the assumption of the repetition
of the past data.
 For example, a two-wheeler company that
sells two-wheelers wants to make sure that
it has enough sales staff and vehicles to
meet the next demand.
 So, the company forecast the demand for
offerings (two-wheelers) of next month,
and for this, data of the previous 5 months
is obtained as mentioned below:
 In the naive method, the actual demand
for the month of sep’20 will be considered
as the forecast for the month of Oct ’20.
 So, the demand of Sep’20= Forecast of
Oct’20 = 300.
The same is shown in the below table and chart:
 1.2) Moving Average Method

 In this method, the moving average is calculated

by doing the sum and average of the values
mentioned in a time series over periods that are
specified on a repetitive basis.
 In this, the old value is deleted and the
new value is added each time.
 The next period’s forecast will be the
same as the average calculated by
summing previous or recent observations.
 Also, equal weightage is given to each
observation.
 For example, in the above example of
two-wheelers, the forecast can be
calculated through the moving average
method.
 To calculate the moving average of
three months, an average of the
demand for the previous three
months will be calculated and the
same will be considered in next
month’s forecast.
 Let’s say to forecast the demand of Aug’20 using
the moving average method, actual demand data of
two-wheelers from May’20-Jul-20 will be considered
which is 100, 150, and 200 respectively. So, the
computation of the forecast for Aug’20 would be:
 Forecast of two-wheeler demand for Aug’20:
(100+150+200)/3= 150.
Similarly, the forecast for other months will be calculated and is shown in the
below table:
 Forecasts of five months will be calculated
in the same manner, except for the previous
five months’, an average of demand i.e. from
May’20-Sep’20 will be taken.
 So, the forecast for two-wheeler demand
for Oct’20: (100+150+200+180+300)/5= 186.
 1.3) Weighted Moving Average Method

 In this method, more weightage is given to

recent data or observations as compared to
past data or observations. Unequal weights
can be assigned to the past data.
 The weighted moving average is used
to calculate the weighted average
related to recent sales in order to
estimate the demand for the short-
term.
 The total of all weights in this
method is required to be equal to 1.
 For example, in the above illustration of two-
wheeler demand forecast, to calculate the
monthly demand forecast for May’20 through
Oct’20 using a weighted moving average of
three months, we need to assign weights to
each month’s actual demand for two-wheelers
by ensuring that heavier weight is assigned on
the months that are more recent.
 So, by keeping the above in view, to calculate
the forecast of Aug’20, we have assigned weights
0.12, 0.38, and 0.50 to May’20, Jun’20, and Jul’20
respectively. So, the total of all assigned weights is
equal to 1 and more weights are assigned to the
most recent month.
 Forecast of Aug’20= (weight of May’20 *
actual demand of May’20) + (weight of
Jun’20 * actual demand of Jun’20) + (weight
of Jul’20 * actual demand of Jul’20)
 = (0.12*100) + (0.38*150) + (0.50*200)=
169
Similarly, the forecast for other months are shown in below table and chart :
 1.4) Exponential Smoothing Method

 This method determines forecasts

by using weighted averages that
are based on past observation.
 More importance is given to recent
data or values in a particular series.
 Moreover, in the exponential
smoothing method, weights start
declining or decreasing exponentially
with past observations.
 In more simple words, we can
say, that in the case of the
observation that is the most
recent one, the associated weight
is higher.
 In this method, each new forecast is
determined by adding the past forecast
and the percentage of the value which
is the difference between the actual
forecast and that past forecast. So, the
new forecast will be:
 New forecast = Past forecast value + α
(Actual demand value – Past forecast value)
 In the above formula, α is considered a
Smoothing constant that varies from 0.01 to
0.50. If the value of α is higher, then
changes in time series can be tracked more
closely.
 For example, a computer PC or
Laptop assembling company
assembles personal computers or
laptops from different generic parts.
For this, it purchases generic parts in
bulk at a discounted price from
different sources wherever there is a
good deal in terms of quality and
less price.
 So, the company wants to
forecast the demand for their PCs
or laptops in order to determine
the required generic parts to be
purchased and keep as an
inventory.
 The future demand forecast from
Jan’20-Sep’20 using exponential
smoothing and smoothing
parameter α= 0.2 is computed by
considering demand data of the last
12 months as shown in the below
table.
 Also, in the below example, as the data
for Dec’19 is not available, so it is
assumed that both actual and forecast
for Jan’20 are the same.
 Now, the forecast is made for each
subsequent month (starting from Jan’20)
till Sep’20 using the exponential
smoothing method.
 New forecast = Past forecast value + α
(Actual demand value – Past forecast value)
 The above calculation of the exponential
smoothing forecast of each month is as
under:
 Jan’20= same as actual demand= 30
 Feb’20= 30 + 0.2 (30-30) = 30
 Mar’20= 30+ 0.2 (34-30) = 30.8
 Apr’20= 30.8+ 0.2 (35-30.8) = 31.64
 May’20= 31.64+ 0.2 (30-31.64) = 31.31

 Jun’20= 31.31+ 0.2 (40-31.31) = 33.05

 Jul’20= 33.05+ 0.2 (50-33.05) = 36.44

 Aug’20= 36.44+ 0.2 (42-36.44) = 37.55

 Sep’20= 37.55+ 0.2 (48-37.55) = 39.64

 .Casual or Associative Forecasting Models

 Associative forecasting models include

identifying variables that can be useful
in estimating another variable that has
some type of association with each
other.
 These are also termed casual forecasting
models.
 The assumption, on which these models are
based, is that validity of the link between
independent and dependent variables from a
historical point of view will remain in the
future, and also, it is easy to estimate each
independent variable.
 It has been observed that in
organizations many situations
occur in which there is some
linkage between the data values of
different variables.
 It may not be a direct situation of
cause and effect, but the depth of
association can be predicted.
 This helps in estimating the value of
another variable, once the value of
one variable is available through
mathematical equations.
 2.1) Regression Method of Forecasting
 The regression model is considered a
common tool or method to define a
relationship between two or more
variables in a dataset.
 This includes different statistical techniques
through which the link between a
dependent variable and one or more than
one independent variable can be estimated.
 Using the regression method, it is
easy to assess how strong the
relationship is between variables.
 Also, future relationships between
variables can be determined.
 Multiple Regression Model
 Multiple regression is a
statistical technique used to
understand the relationship
between one dependent variable
and two or more independent
variables.
 The goal is to model the dependent
variable as a function of the
independent variables.
 Explanation
 In this equation:

 Y=a+bX1+cX2+dX3
Y is the dependent variable we are trying to predict
or explain.

X1, X2, X3 are the independent variables that

influence Y.

a is the intercept, which is the value of Y when all

independent variables are zero.

b, c, d are the coefficients that represent the change

in Y for a one-unit change in the respective
independent variables.
 Example
 Let's say we want to predict the salary
(Y) of employees based on their years of
experience (X1), education level (X2),
and number of training programs
attended (X3).
The multiple regression equation might look like
this:
Salary=30,000+2,000×Experience+1,500×Education+500×Training
The intercept (30,000) is the base salary.
For each additional year of experience, the salary
increases by $2,000.
For each higher level of education, the salary
increases by $1,500.
For each training program attended, the salary
increases by $500.
 So, if an employee has 5 years of

experience, a master's degree (let's assume

education level = 2), and has attended 3
training programs, their predicted salary
would be:
 Salary=30,000+2,000×5+1,500×2+500×3=30,000+10,00

0+3,000+1,500=44,500

 This example shows how multiple regression

can be used to predict outcomes based on

several influencing factors.
The Trend Projection Model
 The Trend Projection Method is
a forecasting technique that
uses historical data to predict
future values by fitting a trend
line to the data.
 Here's a numerical example:
 Let's say we have the sales data for a company over
the past five years:
Year Sales (in thousands)
2019 50
2020 55
2021 60
2022 65
2023 70
To forecast the sales for 2024 using the Trend
Projection Method, we can follow these steps:

1. Assign time periods: Convert the years into time

periods (e.g., 2019 = 1, 2020 = 2, ..., 2023 = 5).

2. Calculate the trend line: Use the least squares

method to fit a linear trend line to the data.

 The trend line equation is typically in
the form: Y=a+ bX. Where:
( Y ) is the sales,
( X ) is the time period,
( a ) is the intercept, and
( b ) is the slope.
3. Compute the slope (b)

𝑵(∑𝑿𝒀)−(∑𝑿)(∑𝒀)
b=
𝑵(∑𝑿𝟐) −(∑𝑿)𝟐

4. ompute the intercept (a):

∑𝑌−𝑏(∑𝑋)
a=
𝑁
Let's calculate these step-by-step:
( N = 5 ) (number of data points)
( \sum X = 1 + 2 + 3 + 4 + 5 = 15 )
( \sum Y = 50 + 55 + 60 + 65 + 70 = 300 )
( \sum XY = (1*50) + (2*55) + (3*60) + (4*65) + (5 *70)
= 950
( \sum 𝒙𝟐 = 𝟏𝟐 +𝟐𝟐 +𝟑𝟐 +𝟒𝟐 +𝟓𝟐
X^2 = 1^2 + 2^2 + 3^2 + 4^2 + 5^2 = 55
Now, calculate(b)

5(950)−(15)(300) 4750−4500 250

b= = = =5
5 55 −(15)2 275−225 50
Next, calculate (a)

300−5(15) 300−75 225

a= = = = 45
5 5 5
 So, the trend line equation

 is: Y=45+5XY=45+5X

 To forecast the sales for 2024 (which is time

period 6): Y=45+5(6)=45+30=75

 Therefore, the projected sales for 2024 are
75,000 units.
 Here are a couple of numerical examples to
illustrate economic forecasting
 Let's say an economist wants to forecast the
GDP growth for the next year.
 They might use historical data and a time
series model.
 Suppose the GDP growth rates for the past
five years were as follows:
• Year 1: 2.5%

• Year 2: 3.0%

• Year 3: 2.8%

• Year 4: 3.2%

• Year 5: 3.0%
 Using a simple moving average method, the
forecast for Year 6 could be the average of
the past five years:
 Forecasted GDP Growth=
2.5+3.0+2.8+3.2+3.0

5
 ​=2.9%
 Example 2: Inflation Rate Forecast
 An economist might also forecast the inflation
rate using a regression model. Suppose they
have data on inflation rates and unemployment
rates for the past ten years.
 They could use this data to estimate the
relationship between these variables (Phillips
curve) and predict future inflation.
 If the regression equation is
Inflation Rate=1.5+0.5×Unemployment Rate
 And the forecasted unemployment rate for the
next year is 4%, the forecasted inflation rate would
be: Forecasted Inflation Rate= 1.5+0.5×4=3.5%
 Unemployment Rate Forecast
 Suppose an economist wants to forecast the
unemployment rate for the next quarter. They might use
a linear regression model based on historical data of
unemployment rates and GDP growth rates.
 Let's say the regression equation
is: Unemployment Rate=6.0−0.5×GDP Growth
 If the forecasted GDP growth rate for the next quarter
is 2%, the forecasted unemployment rate would be:
 Forecasted Unemployment Rate=

 6.0−0.5×2=5.0%
 Retail Sales Forecast
 A retail company wants to forecast its sales for the
next month. They use historical sales data and a
time series model.
 Suppose the sales for the past six months (in
thousands of units) were:
• Month 1: 50
• Month 2: 55
• Month 3: 53
• Month 4: 60
• Month 5: 58
• Month 6: 62
 Using a simple exponential smoothing method
with a smoothing constant (α) of 0.3, the
forecast for Month 7 can be calculated as
follows:
 Forecast for Month 7=α×Sales in Month
6+(1−α)×Forecast for Month 6
 Assuming the forecast for Month 6 was 57
 Forecast for Month 7
=0.3×62+0.7×57=18.6+39.9=58.5 (thousand units)
 Economic forecasting in developing
countries
 Economic forecasting in developing countries
faces several significant obstacles:
1. Data Quality and Availability: Reliable and timely data is
often scarce in developing countries.
This lack of high-quality data makes it challenging to create
accurate forecast.
[Link] Instability: Frequent changes in government,
policy shifts, and political unrest can disrupt economic
activities and make it difficult to predict future
economic conditions.
3. Economic Volatility: Developing economies are
often more susceptible to external shocks, such as
fluctuations in commodity prices, natural disasters,
and global economic changes. This volatility
complicates the forecasting process
[Link] Weaknesses: Many developing
countries have weaker institutional frameworks,
which can lead to inefficiencies in data collection,
analysis, and policy implementation
[Link] Technological Infrastructure: The lack
of advanced technological tools and infrastructure
can hinder the ability to gather and analyze data
effectively
6. Informal Economy: A significant portion of
economic activity in developing countries occurs in
the informal sector, which is difficult to measure
and predict
[Link] Capital Constraints: There may be a
shortage of skilled economists and analysts who
can develop and interpret complex forecasting
models
 Addressing these obstacles requires investment in
data infrastructure, strengthening institutions,
improving political stability, and enhancing human
capital through education and training.
 The main obstacles to economic
forecasting in Sudan:
[Link] Instability: Frequent political changes
and conflicts create an unpredictable environment,
making it difficult to forecast economic trends
accurately
[Link] Quality and Availability:

There is often a lack of reliable and timely economic

data, which hampers the ability to make accurate
forecasts
[Link] Volatility:

Sudan's economy is highly susceptible to external

shocks, such as fluctuations in commodity prices
and global economic changes
[Link] Weaknesses:
Inefficiencies in government institutions and policy
implementation can disrupt economic activities and
data collection
 Informal Economy:

 A significant portion of economic activity occurs

in the informal sector, which is difficult to
measure and predict
 Addressing these challenges requires improving
political stability, enhancing data collection
methods, and strengthening institutional
frameworks.
 Indicators Used in Economic
Forecasting
 To assess the health and potential of an economy,
economists rely on a range of indicators.
 These indicators provide vital information about
different aspects of the economy, helping experts
identify trends and patterns that can contribute to
accurate predictions.
 Here are some commonly used indicators:
1. Gross Domestic Product (GDP): GDP is one of the most
crucial indicators used in economic forecasting. It measures the
total value of goods and services produced within a country over
a specific time period.
 Changes in GDP can signal economic growth
or contraction, making it an essential tool for
forecasting.
2. Inflation Rate:
Inflation refers to the general increase in prices
of goods and services over time. Monitoring
inflation rates allows economists to predict
changes in the purchasing power of consumers
and the overall cost of living.
1. By understanding inflation, economic
forecasters can gauge the impact on
interest rates, investments, and
consumption patterns.
[Link] Figures:

Employment data, such as the unemployment

rate and job creation numbers, plays a crucial
role in economic forecasting.
Changes in employment figures can
indicate shifts in consumer spending power,
overall economic activity, and the likelihood
of business expansion or contraction.
[Link] Confidence Index:
Consumer confidence reflects people’s
optimism or pessimism about the economy’s
future. By tracking this index, economists can
gauge consumer spending patterns,
investment decisions, and overall economic
sentiment.
5. Interest Rates:
Interest rates are a critical factor in economic
forecasting, influencing borrowing costs,
investments, and consumer spending.
Forecasters closely monitor changes in interest
rates, as they can give insights into future
economic activity and the performance of various
sectors.
 An Example: Economic Forecasting in Action
 Let’s consider a hypothetical scenario. Imagine
that economists are assessing the impact of a
potential increase in interest rates on a
country’s economy.
 By analyzing historical data and current
economic indicators, they predict the following
outcomes:
• Higher borrowing costs:
• A rise in interest rates would make it more
expensive for individuals and businesses to
borrow money from banks, leading to a
decrease in consumer spending and business
investments.
• Lower inflation rates: Higher interest rates tend to
curb inflation by reducing spending. As
consumers and businesses spend less, the
demand for goods and services slows down,
leading to lower overall price increases.
 Slower economic growth: With reduced consumer
spending and business investments, the economy is
likely to experience slower growth rates.