Q-4: Which method provides better forecasts?

Regression method is better than trend method because trend method uses single variable
and gives error percentage as 8.281750767 in CPI whereas regression method uses two
variables with an error of 8.297491741 in CPI. It is observed that there is not much
difference in the error in the error but as there are more variables in regression so value is
more accurate.

Q-5: How can you improve the forecasts?

The forecasting can be improved by removing the errors located in it. The errors are
1) Multicollinearity:
Here two variables are highly correlated with each other that means one can be
linearly predicted from the others with a substantial degree of accuracy. Multicollinearity is a
problem because it can increase the variance of the coefficient estimates and make the estimates
very sensitive to minor changes in the model. It can be removed if one of the variables in your

model doesnt seem essential to your model, removing it may reduce

multicollinearity. Examining the correlations between variables and taking into
account the importance of the variables will help you make a decision about what
variables to drop from the model. We may also be able to find a way to combine the
variables, but only if it seems logical. The impact of multicollinearity can be reduced
by increasing the sample size of our study. You can also reduce multicollinearity by
centring the variables.
2) Heteroskedasticity
It refers to the circumstance in which the variability of a variable is unequal across
the range of values of a second variable that predicts it. Regression analysis using
heteroskedastic data will still provide an unbiased estimate for the relationship between the
predictor variable and the outcome, but standard errors and therefore inferences obtained from
data analysis are suspect. Biased standard errors lead to biased inference, so results of hypothesis
tests are possibly wrong.
To fix the issue of this kind of error View logarithmic data as Non-logarithmic series that are
growing exponentially often appear to have increasing variability as the series rises over time.
Also use different specification for the model as X variables etc.
3) Auto-correlation
It is the relation amongst the elements of series and others of the same series which are separated
from them at a given interval. The auto correlation can be removed by using
(a) Include dummy variable in the data.
(b) Estimated Generalized Least Squares
(c) Include a linear (trend) term if the residuals show a consistent increasing or decreasing pattern