1.Time Series analysis 2.
Econometric Method
3.Barometric Method
4. Input- Output Analysis (End-use Method)
1.Time Series analysis a. Trend Analysis i. Graphical Method ii. Least square Method
2. Econometric Method a. Regression Method i. Simple Regression Analysis ii. Multiple regression Analysis
3. Barometric Method a. Leading indicators b. Coincident Indicators c. Lagging indiactors. 4. Input Output Method.
TIME SERIES ANALYSIS
Changes or movements in a variable overtime
constitute a time series. As far as demand forecasting is concerned, the variable in question will be the demand of the product overtime.
a.Trend projection.
This is a classical method of business forecasting. This method is essentially concerned with the study of
movement of variables through time. The use of this method requires a long and reliable time-series data.
Trend projection.
The trend projection method is used under the
assumption that the factors responsible for the past trends in the variable to be projected(eg.sales and demand) will continue to play their part in future in the same manner and to the same extent as they did in
the past in determining the magnitude and direction
of the variable.
In projecting demand for a product, the trend method
is applied to time-series data on sales
There are two techniques of trend projection based on
time-series.
A).Graphical Method- this is also called free hand
method.Under this method, annual sales data is plotted on a graph paper and a line/curve is drawn through the
plotted points. The curve is then projected into the
future to forecast demand.
Although, this method is very simple and least
expensive, the projections made are not reliable .
Least square method- generally statisticians use this
method for forecasting demand.Fitting trend equation is a formal technique of projecting the trend in demand.
Under this method, a trend line (or curve) is fitted to the
time series sales data with the aid of statistical techniques.
The form of the trend equation that can be fitted to the
time series data is determined either by plotting the sales data or by trying different forms of trend equations for the best fit.
Most common types of trend equations- linear and
exponential trends.
ECONOMETRIC METHOD-
This method involves the combination of economic
theory, mathematical model and statistical tools. The
forecasts made through this method are more reliable
than those made through any other method.
Econometric methods are described under
REGRESSION METHOD.
It may be a simple-equation regression model or it may
consist of simultaneous equations.
REGRESSION METHOD
This is the most popular method of demand estimation. it
combines economic theory and statistical techniques.
The regression method involves a study of the dependence
of one variable on the other variable.In demand forecasting, demand is estimated with the help of a regression equation wherein demand is the dependent variable and variables that affect or determine demand eg.price,advertising expenditure, consumers income etc. are called the independent variable.
Simple regression analysis- when only one
independent variable eg. Price and one dependent variable eg. Demand is considered, we have a simple regression analysis.
Multiple regression analysis- when two or more
independent variables eg. Price, advertising
expenditure and only one dependent variable say, demand are taken into account, we have a multiple regression analysis.
BAROMETRIC METHOD OF FORECASTING-
This method follows the method meteorologists use in
weather forecasting. meteorologists use the barometer
to forecast conditions on the basis of movements of
mercury in the barometer.
Following the logic of this method, many economists
use economic indicators as a barometer to forecast trends in business activity.
This method has been refined and developed further
in 1930s by the National Bureau of Economic Research (NBER) of USA and since then adopted by US. for
forecasting purposes.
The basic approach of barometric technique is to
construct an index of relevant economic indicators.
The indicators used in this method are classified as-. a.Leading indicators
b. Coincidental indicators c. Lagging indicators.
A Leading indicator- signal in advance a change in the
basic performance of the economy as a whole.leading series consists of indicators which move up or down
ahead of some other series.
some examples are : i. index of net business (capital) formation
ii. New orders for durable goods
iii. New building permits iv. Change in the value of inventories
v. index of the prices of materials
vi. Corporate profit after tax.
b. Coincident indicators- are those whose movements
coincide roughly with and provide a measure of the current performance of aggregate economy.
They move up and down simultaneously with the level of
economic activity.
Some examples are i.GNP at constant prices. ii. Sales recorded by the manufacturing, trading and retail
sectors.
iii.rate of unemployment
c. Lagging indicators are those indicators which
usually follow rather than lead coincident indicators.
The lagging series, consists of those indicators which
follow a change after some time lag.
Some of the indices identified by NBER are
i. outstanding loans ii. Lending rate for short- term loans.
4. INPUT OUTPUT ANALYSIS (End- Use Method)
One of the most sophisticated and promising forecasting
method developed in recent decades is Leontiefs input output model of the economy.
This model enables a forecaster to trace the effects of an
increase in demand for one product through other industries.
Eg. An increase in demand for automobiles will first lead to
an increase in the output of the auto industry. This, in turn
will lead to an increase in demand for steel, glass, plastics, tyres, fabric and so on.
In this method (also known as end-use method), the
demand for a product is forecast on the basis of a study of its quantity demanded by other industries
(who use it as an input or an intermediate product)
and the quantity demanded by the final demand sectors ( household sector, government sector and foreign sector).
