I have a question about how to a create price forecast for a good in nominal and real terms.

Using crop prices as an simple example where you believe the price of a crop is related to a stock-to-use ratio and you had historical nominal prices and the historical stocks-to-use ratio, and then used a view of the future stocks-to-use ratio over a period of time to predict the price of the crop over that future time period then:

i) What price are you forecasting? Is it the nominal or real?

ii) How would you convert the forecast price to a nominal, or a real forecast price as the case may be?

iii) Given that crop prices have historically decreased in real terms over the long term would you need to account for this in the model, or is it incorporated in the previous step?

Similarly say you were using the past price to predict future prices (assuming you are predicting far enough out for changes in the price level to be material) again what is the price you are predicting and how would you convert the forecast from real to nominal (or vice-versa) price.

  • $\begingroup$ It all depends on the structure of your model. For (ii) you could inflate or deflate using a consumer price index $\endgroup$ – Henry Oct 5 '19 at 7:25

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