Cambridge International as and a level Economics Ebook

How and why economists make 
forecasts
One of the most important tasks of the professional 
economist, whether in government or private sector 
employment, is to be able to forecast future economic 
phenomena. Many economic variables are heavily 
dependent upon the state of the economy. For example, 
forecasts of economic growth are widely used by 
economists for all sorts of reasons related to economic 
policy and business well-being. Th
e longer the time period 
the forecast covers, the greater the uncertainty involved. 
When the Bank of England, for instance, makes forecasts 
of infl ation it produces fan charts to refl ect this greater 
uncertainty.
Types of forecast
Economists use various types of forecasting methods. Th
e 
three main ones are:
1
statistical forecasts based on simple or complex future 
extrapolation techniques
2
using models to produce a range of forecasts – this is 
particularly true of models of the economy involving 
complex interrelationships
3
forecasts based on intuition, experience or even guesswork, 
i.e., not involving statistical methods.
Macro- and microeconomic forecasts
Finance ministers and other government offi
cials fi nd 
it essential to have estimates of projected variables such 
as the unemployment rate, infl ation rate, balance of 
payments position and economic growth rate. Th
ese 
macroeconomic forecasts are required on a short-term 
basis (one year or less) or over a longer period of time. 
In the case of the unemployment rate, the importance of 
forecasting is shown in 
Figure 4.
Th
is seems quite simple. In practice, however, the 
process is much more diffi
cult and at stages 3 and 4 
further assumptions are to be made with regard to other 
sources of revenue and taxation.
Microeconomic forecasts are not quite as obvious, but 
one example that develops out of 
Chapter 2
is the need to 
be able to make forecasts of demand. Th
ese are important 
for future business and economic planning.
Returning to 
Figures 2a
and
 2b 
on page 
7,
any business 
in the tourism sector has a need for a forecast of future 
numbers of tourists. Th
is is by no means easy because of 
the many factors involved. We can get an idea of some of 
these from the general determinants of demand that are 
analysed in 
Chapter 2
. Th
ey include:
■
the average price of tourism in Mauritius
■
the income of tourists
■
the price of substitute destinations and the price of 
complements such as air travel
■
a range of non-price factors that might determine whether 
tourists are attracted to Mauritius.
Looking at each of these factors, it is clear that a whole 
series of separate forecasts has to be made before an 
aggregate forecast can be made. Th
ese include:
■
forecast inflation rates in Mauritius
■
forecast economic growth rates in countries generating 
tourists for Mauritius
■
forecasts of the costs of tourism in competing destinations 
and forecasts of the future cost of air travel
■
alternative tourism destination and leisure options in the 
tourists’ home market
■
safety and security issues, health issues and so on, globally 
as well as in Mauritius.
Forecast of
unemployment
rate
(for next year)
Stage 1 
Stage 2
Stage 3
Stage 4
Forecast
of tax
revenue
Net
servicing
requirement
Forecast
of
unemployment
benefits