Question

4.   Give an example of how you might use a trend line to make a prediction about an outcome. Identify the variables and explain the rationale for using the trend line to predict the outcome.

Answer 1

Suppose we want to get real GDP of a country over the year. This is an example of trend (most of the cases it is an exponential trend). Here the variables are "GDP" and "Year". This is trend because economic series are growing and percentage changes are stable in long run. Exponential trend is estimated by linear model after taking log. A trend line is most reliable when R square vale is close to 1. Trend line may be linear, logarithmic, exponential, polynomial etc. Another example of linear trend is "the sales of air conditioner over around 15 years period" where the variables are "Sales of air conditioner" and "Year".