Stevens, Peter D. (Student of economics)
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There are two basic approaches to forecasting: model building and time data analysis. Model building, the more complex of the two, takes basic economic relationships and develops a simple model for the data. The simple income and consumption equations, Y=C+I and C=α+βY, are a good example of a model. The regression analysis as a method of forecasting shall be examined under the model building approach. The second method, data-based analysis, derives its forecasts on the past values of the forecasted variable. Under this approach, we shall look at exponential smoothing and the ARIMA techniques. These three techniques, regression, exponential smoothing, and ARIMA modeling, shall be explained and then applied to an empirical example.