What is Economic Forecasting?

Malcolm Tatum

Economic forecasting is a term used to apply to any methods that are utilized to predict the future movements of an economy. The forecasting may focus on a specific portion of the economy, or involve predicting the movement of the economy as a whole. Often, the strategy used as part of the forecasting process will vary, based on the assumptions made about what is currently occurring within the economy or the specific economic sector.

Economic forecasting is a term used to apply to any methods that are utilized to predict the future movements of an economy.
Economic forecasting is a term used to apply to any methods that are utilized to predict the future movements of an economy.

One example of economic forecasting is a process that is known as economic base analysis. This approach involves segregating the activities under consideration into two classes or categories. One is known as basic, and has to do with industries that export goods and services from the economy. The second is known as non-basic, and has to do with the impact on the economy of those businesses that support the function of the basic industries. This form of classification makes it possible to assess the future impact of exports on the local economy, allowing for the generation of income that remains within the community.

Shift-share analysis is a second means of managing the task of economic forecasting. With this strategy, the focus is on changes that take place within the economy or the portion of the economy that is under consideration. This is accomplished by deconstructing those changes and assessing the impact they generated. For example, the closing of a manufacturing plant and the subsequent unemployment of a number of residents of a community may be examined closely as to its effect on the local economy. This data can then be used to project the ongoing impact of this event on the economy for the next month, year, or five years.

There are a number of other approaches to economic forecasting. Land use forecasting focuses on predicting the range and type of movement that takes place in an urban area. Reference class forecasting looks at the potential results of some type of planned action by comparing the situation to similar actions that have already taken place in a similar setting. Many approaches will make use of some type of input-output model, allowing for the entry and exit of resources that are relevant to the condition of the local economy.

In all forms of economic forecasting, the need to make use of accurate historical and contemporary data is essential. Without carefully considering all relevant factors, the process of calculating demand forecast accuracy becomes difficult, if not impossible. As a result, the resulting forecast is much less likely to be accurate, and thus renders the entire effort useless.

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Discussion Comments


One other reason why economic forecasting doesn't always work is because political and social events also have a huge impact on the economy. Often times, the economy is not predictable because these events are not predictable. If we don't know that a bank is going to go bankrupt or that a natural disaster is going to hit, how can we predict the effects that will have on the economy.

If these unpredictable events can be accounted for, then economic forecasting would be accurate and very effective most of the time.


@donasmrs-- Of course, in order to forecast, economists have to go through many different types of economic analyses and also study how things have played out in the past when circumstances were similar. So they can use those examples and their knowledge of how the economy and market works to come to various conclusions and predictions.

For example, economists know from previous experiences that if the government lowers interest rates and prints money, this will eventually lead to inflation, higher prices and less economic development. These kinds of predictions are always right in my opinion.


Is it really possible to predict the economy? I don't think so because I follow the economy closely and economists' predictions are never entirely right. In fact, they get long-term predictions wrong most of the time. I'm not blaming them though. There are just too many factors that play into it.

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