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Original Title: Mca4020 Slm Unit 10

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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

Probability and Statistics Unit 10

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

the series is

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.

Probability and Statistics Unit 10

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.

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

Probability and Statistics Unit 10

(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

Probability and Statistics Unit 10

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.

Probability and Statistics Unit 10

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.

Probability and Statistics Unit 10

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.

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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Probability and Statistics Unit 10

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:

(in tonnes) (in tonnes)

1995 20 2000 25

1996 22 2001 23

1997 24 2002 26

1998 21 2003 25

1999 23 2004 24

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

Probability and Statistics Unit 10

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)

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.

Probability and Statistics Unit 10

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

= 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

Probability and Statistics Unit 10

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 =

=

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.

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

i.e., 1997-1994 = 3

Probability and Statistics Unit 10

Trend values

Time division from the

Year

time of origin = 1994 (x)

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 =

=

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.

Probability and Statistics Unit 10

Monday-Friday = 4

Trend values

Time division from the

Year

time of origin = 110 (x)

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

Probability and Statistics Unit 10

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

averages:

Year Year

(A) (A)

2004 102 2008 108

2005 105 2009 116

2006 114 2010 112

2007 110

This method is most popular and used frequently. The method of least

squares is used to fit straight line trend or parabolic trend.

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.

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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Probability and Statistics Unit 10

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

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

Probability and Statistics Unit 10

(6)

(7)

Implies ,

When X = 1,

When X = 2,

When X = 3,

When X = 4,

When X = 5,

When X = 6,

When X = 7,

Probability and Statistics Unit 10

Year 2004 2005 2006 2007 2008 2009 2010

Sales 80 90 92 83 94 99 92

(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

Probability and Statistics Unit 10

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

formulas

Hence,

When X = -3,

When X = -2,

When X = -1,

When X = 0,

When X = 1,

When X = 2,

When X = 3,

Probability and Statistics Unit 10

Example: Fit a straight line trend by the method of least squares to the

following data and find the trend values

Sales(Y) 10 13 16 21 24 30

Solution: We know

normal equation

Probability and Statistics Unit 10

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

Hence,

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

Probability and Statistics Unit 10

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 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.,

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

Probability and Statistics Unit 10

When the time origin is taken between middle years and would be

zero.

So the above equations become

(9)

(10)

(11)

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.

Values 95 160 255 380 535 720 935

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

following equations simultaneously

Probability and Statistics Unit 10

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

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

=> (12)

(13)

(14)

C = 15, a = 380, b = 140

Thus,

When X = -3, =

When X = -2, =

When X = 0, = 380

When X = 1, = 535

Probability and Statistics Unit 10

When X = 2, = 720

When X = 3, = 935

When X = 4, = 1180

parabola to this data. Estimate the price of commodity for

the year 2013. Also plot the actual and trend values on the graph.

2005 100 2008 140

2006 107 2009 181

2007 128 2010 192

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

following equations simultaneously

Probability and Statistics Unit 10

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

Thus,

When X = -2,

= = 97.744

When X = -1,

= = 110.426

When X = 0,

= = 126.680

Probability and Statistics Unit 10

When X = 1,

= = 146.506

When X = 2,

= = 169.904

When X = 3,

= = 196.874

When X = 6,

= = 299.216

Probability and Statistics Unit 10

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.

1990 17 1996 35

1991 20 1997 55

1992 19 1998 51

1993 26 1999 74

1994 24 2000 79

1995 40

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

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

Probability and Statistics Unit 10

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.

Probability and Statistics Unit 10

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 ------ ------

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

Probability and Statistics Unit 10

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)

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 --------

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

seasonal variations.

1. Arrange the data by years and months(or quarters if quarterly data are

given)

2. Find totals of January, February, March, April, etc.

Probability and Statistics Unit 10

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

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

Probability and Statistics Unit 10

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

Yearly 1080 360 1200

tot.

Yearly 1080/12= 90 30 100

Av.

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

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.

Probability and Statistics Unit 10

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.

Sales 32 50 60

Trend

39 40 40

Values

Seasonal variation -4 7 24

Seasonal

91 119 164

Ind.

Solution:

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

Probability and Statistics Unit 10

---------- --------

(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

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

Probability and Statistics Unit 10

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.

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

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

Probability and Statistics Unit 10

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.

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.

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

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

Probability and Statistics Unit 10

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.

Probability and Statistics Unit 10

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

Probability and Statistics Unit 10

formulas

Hence,

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, =

Probability and Statistics Unit 10

For the year 2006, X = 7 so

the following equations simultaneously

Probability and Statistics Unit 10

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

Thus,

Probability and Statistics Unit 10

Terminal Questions

1.

Probability and Statistics Unit 10

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

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

Seas. 78.02 87.83 107.30

Index

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