FORECASTING Projecting the Future

ECON 22:
Introduction to Mathematical Statistics
What is Forecasting?
• Forecasting is a technique that uses historical data as inputs
to make estimates that are predictive in determining the
direction of future trends and to make informed decisions and
plan for the future.
- Macro level
- Micro level
• It also acts as a planning tool that helps enterprises to get
ready for the uncertainty that can occur in the future.
• Important decisions about what and how many goods to
produce depend very much on the entrepreneur’s estimate of
future demand.
Two Methods of Forecasting
1. Average Arithmetic Growth Rate
2. Regression Analysis or the Least Squares
Regression Method
1. Average Arithmetic Growth Rate
The computation of this method is carried by getting
the percentage change between two values which is simply
the ratio of the change between two years expressed in
percentage form.
Growth Rate:
𝑝𝑟𝑒𝑠𝑒𝑛𝑡 − 𝑝𝑎𝑠𝑡
G𝑅 (%) = x 100
𝑝𝑎𝑠𝑡

Average Growth Rate:

To Project:
𝑡𝑜𝑡𝑎𝑙 𝐺𝑅
AGR = PV = last sale (1+AGR)
𝑛
Example:
Historical Sales Figures of Company CJC 2013-2021

Years Sales Find the sales of the following years:

2014 32,000 2023:
2015 31,280 2024:
2016 33,400 2025:
2026:
2017 36,520
2018 34,200
2019 34,305
2020 35,000
2021 34,980
2022 38,710
2. The Least Squares Regression Method
• This method uses statistical tools and is the most commonly used
method of computing long-term trend of a time series.
• The least square method, as the name implies, fits a trend line to
the date in a manner such that the sum of squared deviations of
actual data from estimated or trend data at a minimum.

Linear Equation: Intercept (a):

y = a + bx ∑𝑦 ∑𝑥
a= −𝑏
𝑛 𝑛
Slope (b):
b=
𝑛 ∑𝑥𝑦 − ∑𝑥 ∑𝑦 To forecast: (substitution method)
𝑛 ∑𝑥 2 − (∑𝑥)2 y = a + b(x)
 Historical Sales Figures of Company CJC 2013-2021

Years Sales Find the sales of the following years:

2014 32,000 2023:
2015 31,280 2024:
2016 33,400
2025:
2026:
2017 36,520
2018 34,200
2019 34,305
2020 35,000
2021 34,980
2022 38,710
 45,000.00

40,000.00

35,000.00

30,000.00
SALES

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

-
2012 2014 2016 2018 2020 2022 2024 2026 2028
YEAR

Sales Figure of Company X in Graphical Form

Measures of
Skewness
Skewness
• It is a measure of the asymmetry of a distribution. A
distribution is asymmetrical when its left and right side are
not mirror images.
• The relationship between the mean and the median will
more or less give us a picture of the shape of the distribution.
3 Types of Distribution

1. Positively-Skewed 2. Normal Distribution 3. Negatively-Skewed

Distribution o A normal distribution Distribution
o A distribution where the where the left side is a o A distribution where
tail extends or is longer mirror image of the right the tail extends or is
at the right side. side. longer at the left side.
o Right skew: o Zero skew: o Right skew:
mean > median mean = median mean < median
The Pearson’s Coefficient of Skewness can be used to calculate
skewness.
Where:
𝟑(x̄ − median) sk = skewness
𝒔𝒌 =
𝒔 x̄ = sample mean
s = sample standard deviation

Generally, for the value of Skewness:

• If the value is less than -0.5, the
distribution considered to
be negatively skewed or left-
skewed where data points cluster
on the right side and the tails are
longer on the left side of the
distribution.
• Whereas if the value is greater than
0.5, the distribution considered to
be positively skewed or right-
skewed where data points cluster on
the left side and the tails are longer on
the right side of the distribution.

• And finally, if the value is between -0.5

and 0.5, we consider the distribution to
be approximately symmetric.
End of Presentation.
 References:
• Bonamente, Max (2018). Statistics And Analysis of
Scientific Data.
• Newbold, P. Carlson, W., and Thorne B. (2007).
Statistics for Business and Economics. 8th Edition.
USA: Pearson
• Pagala, R. (2011). Statistics. Manila: Mind shapers
Co. Inc.
• Rumsey, Deborah J (2019). Statistics Essentials For
Dummies.

Prepared by:
• Santos, David (2011). Probability: An Introduction.
Cherlen J. Cayetano
Instructor
Department of Economics, CEMDS
Cavite State University