Theories Of Business Forecasting
“There are many theories, which are usually followed to make business forecasting. In theory of economic rhythm the available historical data have to be analyzed into their components.”
There are many theories, which are usually followed to make business forecasting. In theory of economic rhythm the available historical data have to be analyzed into their components, i.e. trend, seasonal, cyclical, and irregular variations. The propounders of the theory were of the view that the economic phenomenon behaves in a rhythmic manner and cycles of nearly the same intensity and duration tend to recur.The secular trend obtained from historical data is projected a number of years into the future on a graph or with the help of mathematical trend equation. If the phenomenon is cyclical in behavior, the trend should be adjusted for cyclical movements. When the forecast for a year is to be split into months or quarters then the forecasters should adjust the projected figure for seasonal variations also with the help of seasonal indices.
Action and Reaction theory is based on the Newton’s 3rd law of motion i.e. for every action there is an equal and opposite reaction. When we apply this law for business forecasting, it implies that if there is depression in a particular field of business, there is bound to be boom in it sooner or later. It reminds us of the business of cycle, which has four phases, i.e. prosperity, decline, depression and prosperity.
This theory regards certain levels of business activity as normal and the forecasters have to estimate the normal level carefully. According to this theory if the price of commodity goes beyond the normal level, it must come down also below the normal level because of the increased production and supply of that commodity. Sequence theory or time lag method is based on behavior of different businesses, which show similar movements occurring successively but not simultaneously.
As such, this method takes into account time lag based on the theory of lead lag relationship, which hold goods in most cases. The series that usually change earlier serve as forecast for other related series. This way the element of risk is considerably reduced.
Author - DeeKay
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