Single Equation Models

Many managerial forecasting problems can be adequately addressed with single-equation econometric models. The first step in developing an econometric model is to express relevant economic relations in the form of an equation. When constructing a model for forecasting the regional demand for portable personal computers, one might hypothesize that computer demand (C) is determined by price (P), disposable income (I), population (Pop), interest rates (i), and advertising expenditures (A). A linear model expressing this relation is

The next step in econometric modeling is to estimate the parameters of the system, or values of the coefficients, as in Equation 6.10. The most frequently used technique for parameter estimation is the application of least squares regression analysis with either time-series or cross-section data.

Once the model coefficients have been estimated, forecasting with a single-equation model consists of evaluating the equation with specific values for the independent variables. An econometric model used for forecasting purposes must contain independent or explanatory variables whose values for the forecast period can be readily obtained.

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