ECONOMIC ANALYSIS, EXPECTED VALUE

ANALYSIS AND SUBJECTIVE SCORING

ECONOMIC ANALYSIS
• Economic analysis involves the understanding of macro-economic environment
and its development.

• It helps to predict the course of national economy which affects corporate profits,
investor attitudes and expectations and ultimately security prices.

Types of Economic Forecast

• Short-Term Forecast: period of up to 3 years or shorter periods such as
quarters, half yearly etc.

• Intermediate Forecast: refers to three –to five – year period ahead

• Long – Term Forecast: refers to the period more than five years

Economic Forecasting
• Economic forecasting is the process of attempting to predict the future condition
of the economy using a combination of important and widely followed indicators.
Economic forecasting typically tries to come up with a future gross domestic
product (GDP) growth rate, involving the building of statistical models with inputs
of several key variables, or indicators. Some of the primary economic
indicatorsinclude inflation, interest rates, industrial production, consumer
confidence, worker productivity, retail sales and unemployment rates, to name
several.

Top 5 Economic Forecasting Techniques

1. Surveys
One of the methods of short-term forecasting is to make a survey of the
type of business that one is interested in. The method to do this is
approximate because it is based on beliefs, intentions and future
budgeting of the government. It, however, broadly indicates the future
course of events in the economy.
 2. Indicators
It behaves like a barometer. It gives indication of the economic process
through cyclical timings. This project is a method of getting indications of
the future relating to business depressions and business prosperity.

3. Diffusion Indexes
The diffusion index is a method which combines the different indicators
into one total measure and it gives weaknesses and strengths of a
particular time series of data.
The diffusion index is also called a census or a composite index. The
method adopted in this economic reading of the future, is to take the
leading, the coincidental and the lagging factors together to summarize
them and then to draw out and infer a particular composite answer.

4. Economic Model Building

This is a mathematical and statistical application to forecast the future
trend of the economy. This technique can be used by trained technicians
and it is used to draw out relationships between two or more variables.
The technique is to make one independent variable and dependent
variable and to draw out a relationship between these variables. The
answer of drawing up these relationships is to get a forecast of direction
as well as magnitude.
.

5. Opportunistic Model Building

The method of forecasting is to find out the total income and the total
demand for the forecast period. To this are added the environment
conditions of political stability, economic and fiscal policies of the
government, policies relating to tax and interest rates. This must be added
to Gross domestic investment, government purchases of goods in
services, consumption expenses and net exports.

EXPECTED VALUE ANALYSIS

• Expected value is defined as the difference between expected profits and expected
costs. Expected profit is the probability of receiving a certain profit times the profit,
and expected cost is the probability that a certain cost will be incurred times the cost.

EXAMPLE
• Assume drilling a well costs 400,000 pesos. There are three probable outcomes:
a) 70% probability that the drilled well is a dry hole
b) 25% probability that the drilled well is a producer well with such rate that can
be sold immediately at 2,500,000 pesos
c) 5% probability that the drilled well is a producer well with such rate that can be
sold immediately at 4,000,000 pesos
Calculate the project expected value.

Expected Value=0.7*(0−400,000)+0.25*(2,500,000−400,000)+0.05*(4,000,000−400,000
)= 425,000

SUBJECTIVE SCORING
• A subjective test is evaluated by giving an opinion. It can be compared with an
objective test, which has right or wrong answers and so can be marked
objectively. Subjective tests are more challenging and expensive to prepare,
administer and evaluate correctly, but they can be more valid.
• Subjective scoring is a powerful tool you can use to add assessment items that
are not easily scored via a bubble form to a traditional Scantron test.

EXAMPLE:
• Tests of writing ability are often subjective because they require an examiner to
give an opinion on the level of the writing.