Microeconomic Forecast Problems

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microeconomic forecasting

Prediction of partial economic data

In contrast with macroeconomic forecasting, microeconomic forecasting involves the prediction of disaggregate economic data at the industry, firm, plant, or product level. Unlike predictions of GDP growth, which are widely followed in the press, the general public often ignores microeconomic forecasts of scrap prices for aluminum, the demand for new cars, or production costs for Crest toothpaste. It is unlikely that the CBS Evening News will ever be interrupted to discuss an upward trend in used car prices, even though these data are an excellent predictor of new car demand. When used car prices surge, new car demand often grows rapidly; when used car prices sag, new car demand typically drops. The fact that used car prices and new car demand are closely related is not surprising given the strong substitute-good relation that exists between used cars and new cars.

Trained and experienced analysts often find it easier to accurately forecast microeconomic trends, such as the demand for new cars, than macroeconomic trends, such as GDP growth. This is because microeconomic forecasts abstract from the multitude of interrelationships that together determine the macroeconomy. With specialized knowledge about changes in new car prices, car import tariffs, car loan rates, and used cars prices, among other factors, it is possible to focus on the fairly narrow range of important factors that influence new car demand. In contrast, a similarly precise model of aggregate demand in the macroeconomy might involve thousands of economic variables and hundreds of functional relationships.

This is not to say that precise microeconomic forecasting is easy. For example, in August 1999, Standard and Poor's DRI forecast new car and light truck sales of 15.7 million units for the 2000 model year. This was a reasonable number, and within the 15.3-16.0 million unit range of forecasts provided by the University of Michigan, Blue Chip Economic Forecasters, and others. Unfortunately, in September 2000, all such forecasts proved too conservative in light of the 17.2 million units actually sold in a robust economic environment. Undaunted, forecasters expected unit sales of 16.1 million in 2001 and 16.8 million in 2002. Those numbers looked good, until terrorist attacks in New York City and Washington, DC, on September 11, 2001, sent new car and light truck sales into a tailspin as consumer confidence plummeted. At that point, it became anybody's guess as to how long it would take for consumer confi dence and new car and light truck sales to recover. Obviously, accurate auto and light truck demand forecasting is tough even for industry experts.

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Responses

  • wolfgang
    What difference exists between microeconomics and managerial economics?
    9 years ago

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