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Probability and Statistics Unit 10

Unit 10 Time Series


Structure:
10.1 Introduction
Objectives
10.2 Meaning
Role of Time series Analysis
10.3 Components of Time Series
10.4 Measurement of Trends
10.5 Measurement of Seasonal Variations
10.6 Measurement of Cyclical Variations
10.7 Measurement of irregular variations
10.8 Summary
10.9 Terminal Questions
10.10 Answers

10.1 Introduction
Time series analysis is most popular method of Business forecasting.
According to Ya-lun-Chou, A time series may be defined as a collection of
readings belonging to different time periods, of some economic variable or
composite of variables such as production of steel, per capita income, gross
national products, price of tobacco or index of industrial production.
In time series, time factor plays a very important role. For example in the
study of consumption, production or price of certain good, purchase, sale,
profits or loses of certain business, agriculture or industrial production,
investments, bank deposits, prices of shares, prediction of temperature,
rainfall etc changes with time. So for predicting its future value a good
knowledge of its past values are required. In other words a statistical
analysis of such type is known as time series analysis.
Time series analysis is an indispensable tool in business, economics,
politics etc. where it is necessary to predict or forecast the values of certain
variables to take decision and adopt necessary plans to succeed.
Objectives:
At the end of this unit the student should be able to:
Understand the meaning of time series analysis

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Explain the components of time series and its different methods of


measurement

10.2 Meaning
Time series is defined as the set of ordered pair of observation taken at
successive points of time. That is it is a series of values of variables whose
values varies with passage of time.
In other words, arrangement of statistical data in chronological order is
known as time series.
Mathematically, it is defined by

Where is the value of variable at time t.

Thus if the values of variable at times are , then

the series is

10.2.1 Role of Time series Analysis


Time series analysis plays a vital role in Business decision making for the
following reasons:
1. Understanding of past behaviour : Since in time series analysis the past
data are arranged in chronological order so by simple observation one
can easily understand the nature of change that takes place with the
variable in course of time. So such analysis will be highly helpful in
predicting the future behavior.
2. Planning future operation: The time series analysis shows the mode of
changes in the value of variable in a given time period. This process
helps in forecasting the future value of a variable after certain period. So
with the help of this series we can make future plans in certain important
matters like production, sales, Five year plan, capital investment
decisions, etc.

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3. Evaluating the performance: Evaluation of the actual performances with


reference to the expected performance is necessary to judge the
efficiency and progress of certain work and this can be easily done by
time series analysis. For example, if the expected sale for 2012 of
certain commodity say refrigerator is 5 crore and the actual sales were
only 2 crores, then one can estimate the cause for shortfall in
achievement. Similarly, our policy of controlling the inflammation and
price rise is evaluated with the help of various price indicies.
4. Comparison Studies: Comparative study of data of two or more periods,
regions or industries gives lot of valuable information which guide a
management in taking the proper course of action for future. A time
series provides a scientific basis for making comparison between the
two or more related set of data as in such series the data are ranged
chronologically arranged.

10.3 Components of Time Series


The time series fluctuations can broadly be classified into four basic types of
variations depending upon the changes in series over a period of year.
These four types of patterns, variations are called components or elements
of time series
(a) Secular Trend
(b) Seasonal Variations
(c) Cyclical Variations
(d) Irregular Variations
In traditional or classical time series analysis the observed value of variable
at any point of time is product of all the four components. That is,

Where T = Trend
S = seasonal Variation
C = Cyclical Variation
I = Irregular Variation.
In another approach, The observed variable is sum of these four
components. That is

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But the multiplicative model is used more often in practice.


(a) Secular Trend or (Trend):
By Secular trend we mean the general tendency of data to grow, decline or
remain constant over a long period of time. For example the data relating to
population, prices, sales, income, money, production etc have a tendency to
grow and data relating to deaths, epidemics, value of fixed assets etc have
tendency to decline while data relating to depreciations, fixed income like
rent, interest etc. have a tendency to remain constant over a long period of
time. Thus, trend means smooth, regular and long term movement of data. It
cannot be sudden and erratic either in upward or in downward direction.
Also, it may not be necessary that the increase or decline should be in the
same direction throughout the given time period. It can be possible that
different tendencies can be observed in same time period.
Trends are divided into two main headings
(a) Linear or Straight line Trend
(b) Non-linear Trends
These are explained as below:
(a) Linear Trend:
A secular trend is said to be linear trend when the data relating to a time
series plotted on a graph clusters more or less around a straight line or it is
exactly a straight line.

Fig. 10.1
(b) Non-Linear trend: When the data of time series gives a curve instead of
straight line then the trend is called Non-Liner trend. Following are few
of the cases of non-linear trend.

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Fig. 10.2
Uses:
1. It helps in getting idea about the pattern of behavior of study which is
very helpful for forecasting anything.
2. It is helpful in making comparison and drawing conclusions in between
two or more time series.
3. It is used in study of short time fluctuations of time series like seasonal,
cyclic and irregular variations.
(b) Seasonal Variation :
Seasonal variations are periodic movements which occur regularly after
fixed period of time. These are short term fluctuations occurring regularly
like yearly, half- yearly, quarterly, monthly or weekly. Since these variations
are repeated in short period of time like 6 months, 3 months, week etc so
they can be predicted accurately but they dont appear in series of annual
figures. Seasonal variation gives accurate result when the data are recorded
at weekly or monthly or quarterly intervals.
The two main causes of seasonal variations are :
(i) Natural cause
(ii) Social Cause
(i) Natural cause : Climate and weather conditions are important factors
causing seasonal variation. Rain fall, humidity, heat etc., affect very much
the sale of different products and industries differently. For example, during
winter there is high demand of woolen clothes whereas in summer the
demand of cotton clothes increases. The production of certain commodities

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like rice, pulse, sugar etc. are carried out according to season. Similarly, the
sales of umbrella increases in rainy season and summers, the demand of
fans, A.c, coolers, ice-creams, cold drink etc. goes high in rainy seasons.
The effect of climate is that there are generally two seasons in agriculture
viz., the growing season and the harvesting season which directly affect the
income of the farmer and which in turn affect the entire business activity.
(ii) Social cause: The factors like local customs, habits, fashions, traditions
and conventions play an important role in seasonal variations. For example
on festival occasion the demand of sweets, dry fruits, gifts increases. The
price of gold, clothes increase more during marriage seasons. The sale of
books, stationary is more in the start of any academic season. The
withdrawal of money form the bank is more in the first week of every month.
Note that all these variations occur in a regular manner and they can easily
be predicted from the past experiences. Seasonal variations are also helpful
in scheduling purchase, inventory control, personnel, requirement, seasonal
financing and selling and advertising programs.
Uses:
Following are the uses of seasonal variations:
1. It is used by businessmen in formulating their strategy relating to sales
and purchase.
2. It is used by producers in making their production schedule. It helps
them to diversify their product line during different seasons.
3. It is also very much beneficial for the customers as the knowledge of
seasonal variations helps them in purchasing the things at cheap price
in off season.
4. It is used in fixing the price of articles in order to keep the things in
demand in particular time.
(c) Cyclical Variations:
These are oscillatory movements. So the movement in a time series with a
period of oscillation more than one year is known as cyclic variations. One
complete period is called cycle. The cyclic movement is generally related
to the Business Cycle. There are four well-defined periods or phases in a
business cycle, namely : (i) Prosperity (ii) decline (iii) depression (iv)
improvement.

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Each phase changes gradually to the next phase. The four phase of
business cycle can very well be shown with the help of following diagram.

Fig. 10.2
In the prosperity phase the business is booming, prices are high and profits
are easily made. There is considerable expansion of business activity. But in
this situation there comes difficulty in transportation of things safely. Wages
increase and labour decrease. The demand for money increases and it
causes increase in interest rates. The situation like dearth of money in
market and price concession etc. also arises and this leads to depression. In
this period factories close, business fails, unemployment increases and the
wages and prices are low. This causes availability of money in market at low
interest, increase in demand for goods and situation starts recovering which
ultimately leads to prosperity or boom. Thus the improvement period
develops into prosperity period and a business cycle is completed. A
business cycle may complete in 3 years, 5 years, 7 years.
The major drawbacks of cyclical variations is that
(i) The period of cycle is not fixed, they differ in different situations making
the study tough and tedious.
(ii) These variations can easily mix up with erratic, random or irregular
forces which makes it almost impossible to separate the effect of
cyclical and irregular forces.

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Uses:
Cyclical variations are extremely useful for following reasons:
1. It is used for making Business policies so that we can avoid fluctuations
in business and get more profits.
2. It is used in predicting the turning points in business activity.
3. It is used in finding irregular variations.
(d) Irregular Variation
Irregular variations are of irregular and do not repeat in a definite pattern. It
includes all other types of variations like seasonal, Secular trend, seasonal
and cyclical movement. Irregular variations are caused by flood,
earthquakes, strikes and wars. It also includes sudden change in demands
or very rapid technological progress. This variation is totally irregular and
unpredictable. It is almost impossible to separate out irregular movements
and cyclical movements. Thus, in time series analysis, trend and seasonal
variations are measured separately and the cyclical and irregular variations
are measured together.

10.4 Measurements of Trends


Trends can be measured by the following methods:
(i) Graphic or free hand curve fitting method,
(ii) Method of Semi-Averages,
(iii) Method of Curve Fitting by Principles of Least Squares
(iv) Method of Moving Averages.
Graphic or free hand curve fitting method
This is the simplest method of studying trend. In this method, the values of a
time series are plotted on a graph paper in the form of histogram. The x
axis is time variable and the y axis is the value variable and the dots are
plotted on the graph paper at the intersecting point of time and value
variables. After this a curves is drawn with a free hand joining these points
in such a way that it represents the general tendency of the time series.
Note:
Following points should be kept in mind while getting curve:
1. The number of points above the line should be same as number of
points below it.
2. The curve should be smooth and not straight line
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3. The number of cycles above the line should be equal to the number of
cycles below it.
4. The first and the last year should be on the opposite turns of the cycle
i.e., if the rising cycle is in the first year the falling cycle should be in the
last year or vice versa.
Merits and demerits:
Merits:
1. It is the simplest method and does not require any mathematical
calculations.
2. It very flexible and we can represent both linear and non-linear trends
easily.
3. It gives us an idea about the basic character of time series and tells us
about which the type of mathematical trend will be appropriate.
Demerits:
1. Since different persons will draw different types of free hand smooth
curve, so it is highly subjective.
2. It does not measure trend values in a precise quantitative form.
3. Although this method is very simple but it takes lot of time to construct a
freehand trend if a careful job is done.
Example: Fit a trend line to the following data by the freehand method:

Year Production of wheat Year Production of wheat


(in tonnes) (in tonnes)
1995 20 2000 25
1996 22 2001 23
1997 24 2002 26
1998 21 2003 25
1999 23 2004 24

Solution: Graphical representation of trend line relating to the production of


wheat by the method of free hand curve is shown in figure

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SAQ1. From the following data fit a free hand smooth curve
Year 1980 1981 1982 1983 1984 1985 1986 1987
Population
65 80 100 70 80 110 115 130
(in millions)

Method of Semi Averages


In this method, the whole data is divided into two parts with respect to time
and the trend line is fitted to the time series basing upon the average values
of its two halves called semi-averages.
For this, the entire series is divided into two halves, for example if we are
given the values for the time from 1990 to 2001i.e, over a period of 12
years, then the two equal part of it will be the data from 1990 to 1995 and
from 1996 to 2001. Note that if the given data is odd in number, then the two
equal parts is obtained by omitting the middle value i.e., if the data is over a
period from 1990 to 2002, then the two equal parts is obtained by omitting
the year 1996 and the two equal parts are from 1990 to 1995 and from 1997
to 2002.The average value of first portion of the series is denoted by and
that of the second half portion by . These two averages are placed
against the mid-point of the respective halves of the series. Then we will
draw a trend value basing on these two semi averages in a linear
manner. The trend line thus obtained can be extended both ways to
estimate intermediate or future values.

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Alternatively, the trend value for different years can also be computed by
adjusting the average change between the two semi averages i.e.,
to any of semi average value in accordance with the times of
deviations from the time of any of the semi averages. Hence, the trend value
for any year is computed by

Where, T = trend value to be computed for any year


= Semi average of the first half of the series
= Semi average of the second half of the series
N = time difference between
x = time deviation from
Merits and Demerits:
Merits:
1. It is simple and easy to fit a trend line
2. It is based on objective method of measuring trend.
Demerits:
1. It is based on only assumption that there is only linear relationship
between the plotted points.
2. The trend values and the predicted values for any future or past period
obtained by this extreme are not precise and reliable.
Example: Fit a trend line to the following data by the method of Semi-
averages:
Toy production Toy production
Year Year
(in crores) (in crores)
1990 53 1997 87
1991 79 1998 79
1992 76 1999 104
1993 66 2000 97
1994 69 2001 92
1995 94 2002 101
1996 105

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Solution: Here n = 13 (odd), so we will divide the whole data into two parts
i.e., from 1990 to 1995 and from 1997 to 2002, excluding the year 1996
= average value of first half portion of series =

= average value of second half portion of series


=

Now, we will plot the values of against the mid value of two halves.
Thus the mid value for the first half i.e., from 1990- 1995 is 1st july,1992 and
the mid value for the years from 1997 to 2002 is 1st July1999
Now, join the points A [1992, ] and B [1999, ] , we get the trend lines
shown in fig.

Example: For the following data fit a trend line and determine the trend
values by the method of semi averages.

Year 1993 1994 1995 1996 1997 1998


Output 20 16 24 30 28 32

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Solution: Method-I
Divide the whole data into two parts i.e from 1993 to 1995 another from
1996 to 1998
= average value of first half portion of series =
= average value of second half portion of series
=

Now, we will plot the values of against the mid value of two halves.
Now, join the points A [1994, ] and B [1997, ] , we get the trend lines
shown in fig.

Alternative method:
Computation of trend values by the averages change

The average change , N is time difference between


i.e., 1997-1994 = 3

Let the average of origin be

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So the trend values to be computed are as follows


Trend values
Time division from the
Year
time of origin = 1994 (x)

1993 -1 20+ 3.33(-1) = 16.67


1994 0 20+3.33(0) = 20
1995 1 20+ 3.33(1) = 23.33
1996 2 20+3.33(2)=26.66
1997 3 20+3.33(3)=29.99
1998 4 20+3.33(4)=33.32
1999 5 20+3.33(5)=36.65

Thus the required trend value for the year 1999 is 36.67

Example: Fit a trend value to the following series by the method of semi-
averages. Also, determine the trend values both by location and by
computation of average change.
Day Sunday Monday Tuesday Wednesday Thursday Friday Saturday
(1) (2) (3) (4) (5) (6) (7)
Sales 125 130 135 110 105 110 115
(Rs)

Solution: Since the total number of days are odd in number so we will
divide the total number in two equal halve by neglecting wednesday i.e from
Sunday to Wednesday another from Thursday to Saturday
= average value of first half portion of series =

= average value of second half portion of series


=

Now, we will plot the values of against the mid value of two halves.
Now, join the points A [Tuesday, ] and B [Friday, ] , we get the trend
lines shown in fig.

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Method-II (Average change)

The average change , N is time difference between i.e.,


Monday-Friday = 4

Let the average of origin be

So the trend values to be computed are as follows

Trend values
Time division from the
Year
time of origin = 110 (x)

Sun.(1) -5 110+ (-5)(-5) = 135


Mon.(2) -4 110+(-5)(-4) = 130
Tues.(3) -3 110+ (-5)(-3) = 125
Wed.(4) 2 110+(-5)(-2) = 120
Thurs.(5) -1 110+(-5)(-1) = 115
Frid.(6) 0 110+(-5)(0) = 110
Satur.(7) 1 110+(-5)(1) = 105

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SAQ 2: Fit a trend line to the following data by the method of semi-
averages:

Sales of Sugar Sales of Sugar


Year Year
(A) (A)
2004 102 2008 108
2005 105 2009 116
2006 114 2010 112
2007 110

Method of Curve fitting by Principles of Least squares:


This method is most popular and used frequently. The method of least
squares is used to fit straight line trend or parabolic trend.

The equation of straight line trend is (1)

Where computed trend value of Y, i.e., that of the value variable


a = intercept of Y variable i.e., the computed trend figure of Y
variable when X = 0
b = Slope of the trend line or the amount of change in the Y variable
with reference to a change of one unit in X
X = the time variable.

Note that a and b are numerical constants.


When this method is applied, a trend line is fitted to the data in such a
manner that the following two conditions are satisfied:
(2)
is least (3)

Eq (2) shows that the sum of deviations of the actual values of Y and the
computed values of Y is zero and eq(3) shows that the sum of squares of
the deviations of the actual and computed values is least from the line.
Now from eq (1) is determined completely if the values of a & b are
known. In order to determine the value of the constants a and b, the
following two normal equations are solved simultaneously
(4)
(5)
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Where N represents time for which data are given.


Note that if the time variable is measured as deviations from its
mean so, which implies

Hence,

Also,

Example: Using the straight line method of least square compute the trend
and draw the line of best fit for the following series:
Day 1 2 3 4 5 6 7
Sale 20 30 40 20 50 60 80

Solution: We know

Where a and b are constants which can be determined by the following


normal equation (as )

Now,
2
Days (X) Sales (Y) XY X
1 20 20 1
2 30 60 4
3 40 120 9
4 20 80 16
5 50 250 25
6 60 360 36
7 80 560 49
Total 28 300 1450 140

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On substituting these values in above equations, we get

(6)
(7)

Multiply eq(6) by 4 and then subtracting it from (7), we get

Implies ,

Now, put the value of b in (6), we get

Thus, , where X is time variable

Computation of trend values

When X = 1,

When X = 2,

When X = 3,

When X = 4,

When X = 5,

When X = 6,

When X = 7,

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Example: For the following data


Year 2004 2005 2006 2007 2008 2009 2010
Sales 80 90 92 83 94 99 92

(i) Fit a straight line trend


(ii) Plot these figures on graph and show the trend line
(iii) Estimate the sale for the year 2012

Solution: We know
Where a and b are constants which can be determined by the following
normal equation

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Now,
Deviation from the 2
Year Sales (Y) XY X
middle year (X)
2004 80 -3 -240 9
2005 90 -2 -180 4
2006 92 -1 -92 1
2007 83 0 0 0
2008 94 1 94 1
2009 99 2 198 2
2010 92 3 276 9
N=7 630

Since, , so we can find the values of a and b from the following


formulas

Hence,

Computation of trend values


When X = -3,
When X = -2,
When X = -1,
When X = 0,
When X = 1,

When X = 2,

When X = 3,

(iii) For the year 2012, X = 5 so

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Example: Fit a straight line trend by the method of least squares to the
following data and find the trend values

Year 2005 2006 2007 2008 2009 2010


Sales(Y) 10 13 16 21 24 30

Solution: We know

Where a and b are constants which can be determined by the following


normal equation

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Now,
Deviation from
2
Year Sales (Y) 2007 year XY X
(X)
2005 10 -2 -20 4

2006 13 -1 -13 1
2007 16 0 0 0

2008 21 1 21 1

2009 24 2 48 4

2010 30 3 90 9

N=7 114

Now, substituting these values in above equation, we get

On solving these we get b = 3.943, a = 17.029

Hence,

Computation of trend values


When X = -2, =
When X = -1, = 13.086
When X = 0, = 17.029
When X = 1, = 20.972
When X = 2, = 24.915
When X = 3, = 28.858

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SAQ3. In a certain industry, the production of commodity is given below:


Year Production Year Production
1994 66.6 2000 93.2
1995 84.9 2001 111.6
1996 88.6 2002 88.3
1997 78.0 2003 117.0
1998 96.8 2004 115.2
1999 105.2

(i) Obtain the least square line fitting the data and construct the graph of
the trend line.
(ii) Compute the trend values for the year 1994-2004 and estimate the
production of commodity during the years 2005 and 2006.

Parabolic method of Least squares:


Parabolic method of least squares is applied for the series which are not
linear. Equation of the form
(8)
is then applied to fit the given data. If eq.(8) is carried only upto the second
power of X i.e., , it is called parabola of second order, if it is upto third
power of X it is called parabola of third order and so on. Usually the most
common case of non-linear trend is parabola of second order i.e.,

Where represents the computed trend value of the Y variable, a is


intercept of Y, b the slope of the curve at the origin of X and c the rate of
change in the slope. The values of a, b and c can be determined by solving
the following three normal equations simultaneously

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When the time origin is taken between middle years and would be
zero.
So the above equations become

On solving these equations, we get

(9)

(10)

(11)

Example: Fit a parabolic equation of second degree to the following data


and obtain all the trend values for the year from 1992 to 1998. Also calculate
the trend value for the year 1999. Also draw the graph of it.

Year 1992 1993 1994 1995 1996 1997 1998


Values 95 160 255 380 535 720 935

Solution: The parabolic equation of second degree is given by

Now, we need to find the constants a, b and c. That is we need to solve the
following equations simultaneously

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Time
Value deviations
Year from 1995 XY
(Y)
(X)
1992 95 -3 -285 9 855 -27 81
1993 160 -2 -320 4 640 -8 16
1994 255 -1 -255 1 255 -1 1
1995 380 0 0 0 0 0 0
1996 535 1 535 1 535 1 1
1997 720 2 1440 4 2880 8 16
1998 935 3 2805 9 8415 27 81
Total 0

Since and 0 so values of a, b and c can be calculated from


formulas (9), (10), (11). That is,

=> (12)

(13)

(14)

On solving these equation, we get


C = 15, a = 380, b = 140
Thus,

Computation of trend value:


When X = -3, =

When X = -2, =

When X = -1, = 255

When X = 0, = 380

When X = 1, = 535

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When X = 2, = 720

When X = 3, = 935

When X = 4, = 1180

Example: The price of commodity during 2005-2010 is given below. Fit a


parabola to this data. Estimate the price of commodity for
the year 2013. Also plot the actual and trend values on the graph.

Year Price(Y) Year Price(Y)


2005 100 2008 140
2006 107 2009 181
2007 128 2010 192

Solution: The parabolic equation of second degree is given by

Now, we need to find the constants a, b and c. That is we need to solve the
following equations simultaneously

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Time
Price deviations
Year from 2007 XY
(Y)
(X)
2005 100 -2 -200 4 400 -8 16
2006 107 -1 -107 1 107 -1 1
2007 128 0 0 0 0 0 0
2008 140 1 140 1 140 1 1
2009 181 2 362 4 724 8 16
2010 192 3 576 9 1728 27 81
Total 27
N=6

On substituting the values, we get

On solving these equation, we get

a = 126.68, b = 18.04, c = 1.786

Thus,

Computation of trend value:


When X = -2,

= = 97.744

When X = -1,

= = 110.426

When X = 0,

= = 126.680

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When X = 1,

= = 146.506

When X = 2,

= = 169.904

When X = 3,

= = 196.874

For the year 2013 X will be 6 so

When X = 6,

= = 299.216

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SAQ 4: Fit the second degree parabolic trend curve to the following data
and obtain the trend values. Also draw the graph showing trend value and
actual graph.

Year Value Year Value


1990 17 1996 35
1991 20 1997 55
1992 19 1998 51
1993 26 1999 74
1994 24 2000 79
1995 40

Method of Moving Average:


In this method trend is calculated by smoothing the fluctuations of data by
moving averages. In this method, the arithmetic averages of different groups
of a set of figures are computed in a moving manner. Each group consists of
equal number of items and the first group begins with the first item and the
last group ends with the last item and at each advancing step the first item
of the preceding group is left aside and one more item that succeeds the
group id included in the next group to get the moving average. For example,
3 yearly moving average is given by

and so on

For 5-yearly moving average

and so on

The average of each group are placed in the middle of the group in the
adjacent column. If the number of items in a group is odd, the moving
average is placed against the mid-value of the time intervals, and if it is
even, the average will be placed between the two middle values of the time
interval it covers.
Note: In case of period of even moving average say, 4-yearly, 6-yearly,
8-yearly the moving average are placed at the center of the time span
between two time periods. But this placement is inconvenient since the

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moving average placed at this place would not coincide with an original time
period. So we apply a process called centering. It is taking a two-period
moving average of the moving averages. Another way of doing it is,
suppose we are calculating 4-yearly moving average, we will first take
4-yearly totals and of these totals, we will again take 2-yearly totals and
divide these totals by 8.
Example: Calculate 3 yearly and 5 yearly moving averages for the following
time series.
Year Sales Year Sales
1988 500 1994 600
1989 540 1995 640
1990 550 1996 620
1991 530 1997 610
1992 520 1998 640
1993 560

Solution: For 3-yearly moving average, we will divide the series in a group
of 3 i.e.

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After getting these moving average next step is to place the moving
average. Since 3 is odd number so the average calculated will be placed
opposite to 2nd number i.e., the value of will be placed in front of sales
of year 1989 and proceed accordingly.
In a similar way we can calculate 5-yearly moving average

And the first moving average ( ) will be placed in front of sales of third
year i.e., in front of 1990 and move accordingly.

3-yearly 5-yearly
Year Sales moving moving
average average
1988 500 ----- ------
1989 540 530 ------
1990 550 540 528
1991 530 533.3 540
1992 520 536.67 552
1993 560 560 570
1994 600 600 588
1995 640 620 606
1996 620 623.3 622
1997 610 623.3 -----
1998 640 ------ ------

Example: Calculate centered 4-yearly moving average for the following


data:
Year Sales Year Sales
1993 2204 1999 2904
1994 2500 2000 3098
1995 2360 2001 3172
1996 2680 2002 2952
1997 2424 2003 3248
1998 2634 2004 3172

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Solution:
4-yearly moving total i.e. 2-yearly
Year Sales moving totals 4-yearly moving
of col (ii) average trend
(i) (ii) (iii) values, i.e, (iv)/8
(iv)

1993 2204 -----


1994 2500 -----
1995 2360 9744 19708 2463.5
1996 2680 9964 20062 2507.75
1997 2424 10098 20740 2592.50
1998 2634 10642 21702 2712.75
1999 2904 11060 22868 2858.50
2000 3098 11808 23934 2991.75
2001 3172 12126 24596 3074.50
2002 2952 12470 2504 3126.75
2003 3248 12544 --------
2004 3172 --------

10.5 Measurement of Seasonal Trend


There are several methods of measuring seasonal variation like
1. Method of Simple averages
2. Ratio-to trend Method
3. Ratio-to-moving Average Method
4. Link Relative Method

Of all these methods, here we are going to discuss Simple averages method
only

Simple Average Method: This method is simplest method of measuring


seasonal variations.

Following are the main steps involved in this method:


1. Arrange the data by years and months(or quarters if quarterly data are
given)
2. Find totals of January, February, March, April, etc.

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3. Divide each total by the number of years for which data are given. For
example if we are given monthly data for 4 years then we shall first
obtain total for each month for 4 years and divide each by 4 to obtain an
average.
4. Compute an average of monthly averages i.e.,
5. Then seasonal indices for different months are obtained by expressing
monthly averages as percentage of . That is

Seasonal index for ith month =

Note: 1. Total of seasonal indices is 12 for monthly data and


4 for quarterly data.

Example: Using the method of simple averages, find the seasonal indices
for the following data:
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec.
Year
1996 15 16 18 18 23 23 20 28 29 33 33 38
1997 23 22 28 27 31 28 22 28 32 37 34 44
1998 22 25 35 36 36 30 30 34 38 47 41 53

Solution:
Year
Seasonal
Seasonal Index
1996 1997 1998 Seasonal Total
Average
(ii) (iii) (iv) (v)=(ii)+(iii)+(iv)
Month (vi)=(v) / 3
(i)
Jan 15 23 25 63 21 =70
Feb. 16 22 25 63 21 =70

Mar. 18 28 35 81 27 =90

Apr. 18 27 36 81 27 =90
May 23 31 36 90 30 =100
June 23 28 30 81 27 =90

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July 20 22 30 72 24 =80
Aug. 28 28 34 90 30 =100

Sept. 29 32 38 99 33 =110
Oct. 33 37 47 117 39 =130
Nov 33 34 41 108 36 =120

Dec 38 44 53 135 45 =150


Yearly 1080 360 1200
tot.
Yearly 1080/12= 90 30 100
Av.

10.6 Measurement of cyclical Variations


There are four main methods of measuring cyclical variations
1. Residual method
2. Direct percentage method
3. Harmonic Analysis method
4. Reference cycle analysis method

Of all these units we will discuss only the residual method

Residual Method:
Multiplicative model:
1. Find the Trend values(T) and seasonal indices (S.I.)
2. Divide the original data by T to get SCI and then divide SCI by S to get
CI, thus
CI = TSCI/TS or Y?TS
3. Find the weighted moving average (usually 3 months with weights 1,2
and 1 for the three months resp.or 1,2,4,2 and 1 to be 5 months resp.) of
the CI values thus obtained.

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Example: Find the cyclical variations by residual method:


Month Jan Feb Mar Apr May June July Aug. Sept.
Sales 56 28 45 39 26 34 36 38 31
Trend
40 39 40 40 39 39 39 39 39
Values
Seasonal
10 -9 8 3 -11 -8 -4 -5 -10
variation
Seasonal
125 76 122 108 71 78 87 85 74
Ind.

Month Oct. Nov. Dec.


Sales 32 50 60
Trend
39 40 40
Values
Seasonal variation -4 7 24
Seasonal
91 119 164
Ind.

Solution:

O(original O/T 100 SCI 100/SI


Month T SI
data) i.e. SCI i.e., CI
Jan 56 40 140 125 112
Feb 28 39 71.8 94 94
Mar 45 40 112.5 92 92
Apr. 39 40 97.5 90 90
May 26 39 67 94 94
June 34 39 87 112 112
July 36 39 92 106 106
Aug. 39 39 97 115 115
Sept. 31 39 79.49 74 107
Oct. 32 39 82.05 91 90
Nov. 50 40 125 119 105
Dec. 60 40 150 164 91

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3 monthly weighted tot (weighs being 1,2,1) Weighted average


---------- --------
(112 1+94 2+92 1)= 392 392/12= 98
(94 1+92 2+90 1)= 368 92
(92 1+90 2+94 1)= 366 91.5
(90 1+94 2+112 1)= 390 97.5
(94 1+112 2+106 1)= 424 106
(112 1+106 2+115 1)= 439 109.75
(106 1+115 2+107 1)= 443 110.75
(115 1+107 2+90 1)= 419 104.75
(107 1+90 2+105 1)= 392 98
(90 1+105 2+91 1)= 391 97.75
--------------- -------------

Note: The weighted average in the last column of the table is obtained by
dividing the weighted totals by sum of weights 1.e., 1+2+1 = 4

10.7 Measurement of Irregular Variations


As we already stated that the irregular variations are very much erratic and
are so mixed with cyclical variations that it is very much difficult to separate
them.
Multiplicative method: Under this model, the irregular variations are
measured by dividing the observed values in a time series by the product of
its other three components i.e., T,S and C .
I = Y/TSC or TSCI/TSC or CI/C
And Cyclical normalcy or Percentage deviation = I - 100
Example:
Month Index C&I Index C Month Index C&I Index C
Jan 88.5 91.8 July 99.1 95.3
Feb 91.2 90.9 August 91.2 94.4
Mar 89.6 91.4 Sept 94.6 94.2
Apr 96.4 93 Oct 94.4 94.6
May 92.3 94.3 Nov 95.2 95
June 95 95.3 Dec 95.4 96

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Solution:
Index of I
% deviations
Month Index CI Index C i.e.,
i.e. I-100
I= CI/C 100
Jan 88.5 91.8 96.4 -3.6
Feb 91.2 90.9 100.3 3
Mar 89.6 91.4 98 -2
Apr 96.4 93 103.7 3.7
May 92.3 94.3 97.9 -2.1
June 95 95.3 99.7 -0.3
July 99.1 95.3 104 4
August 91.2 94.4 96 -3.4
Sept 94.6 94.2 100.4 0.4
Oct 94.4 94.6 99.8 -0.2
Nov 95.2 95 100.2 0.2
Dec 95.4 96 99.4 -0.6

10.8 Summary
In this unit we summarize the concept of time series, its components and
discuss its different methods of measurement with plenty of practical
examples.

10.9 Terminal Questions


1. Fit a trend line to the following data by the method of semi averages.
Also draw the curve for both the origin and trend values

Months No.of Births Months No.of Births


Jan(1) 25 July(7) 24
Feb(2) 31 August(8) 20
March(3) 27 Sept.(9) 22
April(4) 28 Oct.(10 21
May(5) 26 Nov.(11) 20
June(6) 25 Dec(12) 19

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2. Fit a straight line trend by the method of least squares to the following
data relating to the sales of clothes. Also calculate the predicted
earnings for the year 2006.

Year 1997 1998 1999 2000 2001 2002 2003 2004


Sales 76 80 130 144 138 120 174 190

3. Fit a straight line trend to the following data by the method of least
squares and obtain two monthly trend vales for Nov. 2000 and Sept.
1999.
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004
Monthly
12.6 14.8 18.6 14.8 16.6 21.2 18 17.4 15.8
profit

4. Fit a parabolic curve for the second degree to the data given below and
estimate the value for 1999. Also, show the curves for both the original
and trend values.

Year 1993 1994 1995 1996 1997 1998


Sales
10 12 13 10 8 11
(crores)

5. Use the method of simple average to determine the monthly indices for
the following data of production of a commodity for the years 2002,
2003, 2004

(Production in lakhs ) (Production in lakhs )


Month Month
2002 2003 2004 2002 2003 2004
Jan 12 15 16 July 16 17 16
Feb 11 14 15 August 13 12 13
March 10 13 14 Sept. 11 13 10
April 14 16 16 Oct. 10 12 10
May 15 16 15 Nov. 12 13 11
june 15 15 17 Dec. 15 14 15

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10.10 Answers
Self Assessment Questions
1. From above it is observed that there is a gradual rise in the trend value
as against zig zag yearly values. The trend line thus drawn above can
be extended to forecast the values for the future year.

2. Since the given data is odd in number so we will divide the total number
in two equal halves by neglecting 2007 i.e from 2004 to 2006 another
from 2008 to 2010
= average value of first half portion of series =
= average value of second half portion of series

Now, we will plot the values of against the mid value of two
halves.
Now, join the points A [2005, ] and B [2009, ] , we get the trend
lines shown in fig.

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3. Solution: We know , Where a and b are constants which


can be determined by the following normal equation

Now,
Deviation from 2
Year Sales (Y) XY X
2007 year (X)
1994 66.6 -5 -333 25
1995 84.9 -4 -339.6 16
1996 88.6 -3 -265.8 9
1997 78 -2 -156.0 4
1998 96.8 -1 -96.8 1
1999 105.2 0 0 0
2000 93.2 1 93.2 1
2001 111.6 2 223.2 4
2002 88.3 3 264.9 9
2003 117.0 4 468 16
2004 115.2 5 576 25
N = 11 1,045.4

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Since , , so we can find the values of a and b from the following


formulas

Hence,

Computation of trend values


When X = -5, =

When X = -4, =

When X = -3, =

When X = -2, =

When X = -1, =

When X = 0, =

When X = 1, =

When X = 2, =

When X = 3, =

When X = 4, =

When X = 5, =

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(ii) For the year 2005, X = 6 so


For the year 2006, X = 7 so

4. The parabolic equation of second degree is given by

Now, we need to find the constants a, b and c. That is we need to solve


the following equations simultaneously

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Time
Price deviations
Year from 1995 XY
(Y)
(X)
1990 17 -5 -85 25 425 -125 425
1991 20 -4 -80 16 320 -64 256
1992 19 -3 -57 9 171 -27 81
1993 26 -2 -52 4 104 -8 16
1994 24 -1 -24 1 24 -1 1
1995 40 0 0 0 0 0 0
1996 35 1 35 1 35 1 1
1997 55 2 110 4 220 8 16
1998 51 3 153 9 459 27 81
1999 74 4 256 16 1184 64 256
2000 79 5 395 25 1975 125 625
Total N = 6 0

On substituting the values, we get

On solving these equation, we get

a = 34, b = 6.28, c = 0.60

Thus,

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Terminal Questions
1.

2. Least square trend line is

3. Least square trend line is

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Least square trend line for monthly values are

For the nov, 2000, (since origin is July


2000, so Nov. is fourth month from july i.e. x = 4)

For the Sept., 1999, (since origin is


July 2000, so Sept.,1999 is 10 months behind the origin, i.e. x = -10)
4. Parabolic least square trend line is

5.
Jan Feb Mar Apr May June July Aug Sep
Seas. 104.886 97.566 90.25 112.21 112.21 114.62 119.52 92.66 82.98
Index

Oct Nov. Dec.


Seas. 78.02 87.83 107.30
Index

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