Zhenhao Gong In Class Discuss 1 Econ 3313 Spring 2021 1. Forecasting in daily life
(a) Sketch in detail three forecasts that you make routinely, and probably informally, in your daily life. What makes you believe that the forecast object is predictable? What factors might introduce error into your forecasts?
(b) What decisions are aided by your three forecasts? How might the degree of pre- dictability of the forecast object affect your decisions?
(c) How might you measure the ”goodness” of your three forecasts?
(d) For each of your forecasts, what is the value to you of a ”good” as opposed to a ”bad” forecast?
2. Forecasting in business, finance, economics, and government
What sorts of forecasts would be useful in the following decision-making situations? Why? What sorts of data might you need to produce such forecasts?
(a) Shop-All-The-Time Network (SATTN) needs to schedule operators to receive in- coming calls. The volume of calls varies depending on the time of day, the quality of the TV advertisement, and the price of the good being sold. SATTN must schedule staff to minimize the loss of sales (too few operators leads to long hold times, and people hang up if put on hold) while also considering the loss.
(b) You’re a U.S. investor holding a portfolio of Japanese, British, French and German stocks and government bonds. You’re considering broadening your portfolio to in- clude corporate stocks of Tambia, a developing economy with a risky emerging stock market. You’re only willing to do so if the Tambian stocks produce higher portfolio returns sufficient to compensate you for the higher risk. There are ru- mors of an impending military coup, in which case your Tambian stocks would likely become worthless. There is also a chance of a major Tambian currency depreciation, in which case the dollar value of your Tambian stock returns would be greatly reduced.
(c) You are an executive with Grainworld, a huge corporate farming conglomerate with grain sales both domestically and abroad. You have no control over the price of your grain, which is determined in the competitive market, but you must decide what to plant and how much, over the next two years. You are paid in foreign currency for all grain sold abroad, which you subsequently convert to dollars. Until now the government has bought all unsold grain to keep the price you receive stable, but the agricultural lobby is weakening, and you are concerned that the government subsidy may be reduced or eliminated in the next decade. Meanwhile, the price of fertilizer has risen because the government has restricted production of ammonium nitrate, a key ingredient in both fertilizer and terrorist bombs.
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Zhenhao Gong In Class Discuss 1 Econ 3313 Spring 2021
(d) You run BUCO, a British utility supplying electricity to the London metropolitan area. You need to decide how much capacity to have on line, and two conflicting goals must be resolved in order to make an appropriate decision. You obviously want to have enough capacity to meet average demand, but that’s not enough, because demand is uneven throughout the year. In particular, demand skyrockets during summer heat waves – which occur randomly – as more and more people run their air conditioners constantly. If you don’t have sufficient capacity to meet peak demand, you get bad press. On the other hand, if you have a large amount of excess capacity over most of the year, you also get bad press.
3. The basic forecasting framework True or false:
(a) The underlying principles of time-series forecasting differ radically depending on the time series being forecast.
(b) Ongoing improvements in forecasting methods will eventually enable perfect pre- diction.
(c) There is no way to learn from a forecast’s historical performance whether and how it could be improved.
4. Degrees of forecastability
Which of the following can be forecast perfectly? Which can not be forecast at all? Which are somewhere in between? Explain your answers, and be careful!
(a) The direction of change tomorrow in a country’s stock market;
(b) The eventual lifetime sales of a newly-introduced automobile model;
(c) The outcome of a coin flip;
(d) The date of the next full moon; (e) The outcome of a (fair) lottery.
5. Data and forecast timing conventions
Suppose that, in a particular monthly data set, time t = 10 corresponds to September 1960.
(a) Name the month and year of each of the following times: t + 5; t + 10; t + 12; t+60.
(b) Suppose that a series of interest follows the simple process yt = yt−1 + 1, for t = 1, 2, 3, …; meaning that each successive month’s value is one higher than the previous month’s. Suppose that y0 = 0, and suppose that at present t = 10. Calculate the forecasts yt+5,t, yt+10,t, yt+12,t, yt+60,t, where, for example, yt+5;t denotes a forecast made at time t for future time t + 5, assuming that t = 10 at present.
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