An economic forecast is a prediction of future economic activity. It is usually based on an analysis of the current state of the economy and the past history of its behavior, but may also include the effects of special events. Economic forecasts are a common part of business plans and budgets, and also play an important role in financial decisions.
The basic concept of output most widely forecasted is Gross Domestic Product (or its accounting equivalent, Gross National Product). This is the monetary value of all finished goods and services produced within the borders of an economy during a given period. A less well-known related concept is the flow of incomes – which can be thought of as the monetary value of all labor devoted to production, whether it takes place in the form of wages, salaries or profits – a measure of the total flow of economic transactions.
The development of economic forecasting gained impetus after World War II, when it became more important to know what was happening in the economy, and how to respond to it. Modern statistical methods make it possible to predict the future with greater accuracy than ever before. Many different methodologies are employed, ranging from linear regression models to estimated dynamic stochastic general equilibrium (DSGE) models. All of them rely on a statistical characterization of the behavior of a specified economic variable and on the assumption that this representation will persist over time.