- At the microeconomic level, there exist dynamic relationships between prices, production, inventory and consumption. An unexpected rise or fall in any of these elements can create imbalance, or tension, in the microeconomic system. At the macroeconomics level, imbalances can occur when nominal income growth exceeds real economy growth. This tension can change output and inflation over the short and long term.
- Economic forecasting tools are becoming more advanced while economic structure is simultaneously becoming more complex. This evolution is effectively keeping a definitive level of accuracy just out of reach. Economic forecasters are up against a constant challenge to combine discipline and flexibility into an approach that is both systematic and intuitive. Many types of models are used to represent economic conditions. The outputs of these models are often subject to a measurement of accuracy. Forecast error is the difference between the actual and forecasted values for the time period. Aggregate errors are measured by mean absolute error, mean squared error, mean absolute percentage error and other equations that give a reference point to the model's accuracy.
- Forecasting models are basic frameworks developed to illustrate the complex dynamics of the economy. Models represent economic processes through logical and quantitative relationships between the variables considered. Mathematics and structural parameters are often used to put the model in context to a specific economic situation. Quantitative models are designed to accurately predict future conditions. Qualitative models are designed to explain economic dynamics, though they may not inform accurate predictions. Types of models include stochastic, non-stochastic mathematical, qualitative, accounting, optimality and constrained optimization models. Forecasting accuracy is based on how well present conditions are represented and whether or not the correct type of model was used for the context of the problem.
- Being able to forecast economic events allows policymakers to control economic growth to a healthy, sustainable pace. If economic activity is forecasted with logical assumptions, the results can affect national economic policy. Economic policy has the ability to change future economic activity and needs. Business and household management can be affected by reasonable economic arguments resulting from large and small scale studies. Economic forecasting is also very useful in finance and investment, including trading strategies and risk management.