1. What is forecasting?

Forecasting is a technique that uses historical data as inputs to make informed estimates that are
predictive in determining the direction of future trends. Businesses utilize forecasting to determine how
to allocate their budgets or plan for anticipated expenses for an upcoming period of time. Forecasting
addresses a problem or set of data. Economists make assumptions regarding the situation being
analyzed that must be established before the variables of the forecasting are determined.

2. What are the approaches in forecasting?

In general, forecasting can be approached using qualitative techniques or quantitative ones. Quantitative
methods of forecasting exclude expert opinions and utilize statistical data based on quantitative
information. Quantitative forecasting models include time series methods, discounting, analysis of
leading or lagging indicators, and econometric modeling that may try to ascertain causal links.
Qualitative forecasting models are useful in developing forecasts with a limited scope. These models are
highly reliant on expert opinions and are most beneficial in the short term. Examples of qualitative
forecasting models include interviews, on-site visits, market research, polls, and surveys that may apply
the Delphi method (which relies on aggregated expert opinions). A time series analysis looks at historical
data and how various variables have interacted with one another in the past.

3. Classify different types of forecast.

Forecasting models can be classified into two groups: quantitative and qualitative models. Quantitative
forecasting models are approaches based on mathematical or statistical modeling. Qualitative methods,
on the other hand, are subjective in nature.

4. Describe how to choose a forecasting technique.

There are several forecasting methods that can be broadly segmented as either qualitative or
quantitative. Within each category, there are several techniques at one's disposal. Under the qualitative
methods, techniques may involve interviews, on-site visits, the Delphi method of pooling experts'
opinions, focus groups, and text analysis of financial documents, news items, and so forth. Under
quantitative methods, techniques generally employ statistical models that look at time series or cross-
sectional data, such as econometric regression analysis or causal inference (when available). Forecasts
help managers, analysts, and investors make informed decisions about the future. Without good
forecasts, many of us would be in the dark and resort to guesses or speculation. By using qualitative and
quantitative data analysis, forecasters can get a better handle of what lies ahead. Used by businesses,
forecasts and projections are used to inform managerial decisions and capital allocations. Analysts use
forecasts to estimate corporate earnings for subsequent periods. Economists may make more macro-
level forecasts as well, such as predicting GDP growth or changes to employment. But, since we cannot
definitively know the future, and since forecasts often rely on historical data, their accuracy will always
come with some room for error, and in some cases may end up being way off.