Analysis of Time Series

Meaning
An arrangement of statistical data in accordance with time of occurrence or in a
chronological order is called a time series.
For example, if we observe agricultural production, sales, National Income etc.,
over a period of time, say over the last 3 or 5 years, the set of observations is
called time series. Thus, a time series is a set of quantitative readings of some
variables recorded at equal intervals of time. The interval may be an hour, a day,
a week, a month, or a calendar year. Hourly temperature reading, daily sales in a
shop, weekly sales in a market, monthly production in an industry, yearly
agricultural production, population growth in ten years, are examples of time
series.

Uses of Time Series

The time series analysis is useful in every sphere. It is very important in
economics, business, state administration and planning, science, astronomy,
sociology, biology, research work, etc., because of the following reasons.
➢ It helps in understanding past behaviour and it will help in estimating
the future behaviour.
➢ It helps in planning and forecasting. It is very essential in business and
economics. With the help of time series, we can prepare plans for the
future; short range and long-range estimates are also possible.
➢ Comparison between data of one period with that of another period is
possible.
➢ We can evaluate the progress in any field of economic and business
activity. For example, with the change in price level, we can know the
change in the purchasing power of money.
➢ Seasonal, cyclical, secular trend of data is useful not only to
economists but also to the businessman.

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Components of time series
There are a large number of forces affecting time series. As a result, there are
fluctuations of time series. There are four basic types of variations and these are
called the components or elements of time series. They are:

Components

Long-term Short-term

Secular Cyclical Seasonal Irregular

Secular Trend
The general tendency of the time series data to increase or decrease or stagnate
during a long period of time is called the secular trend, also known as long-
term trend. Trend analysis facilitates us to compare two or more time series
over different period of time and this helps to draw conclusion about them.

Seasonal Variation
Business and economic activities vary during some seasons in a year. Umbrellas
are sold more in rainy season. In winter season, sale of the woolen clothes will
increase. In hot season, the sales of ice, ice cream, fruit salad, etc. will increase.
Agricultural production depends upon the monsoon.

Man-made conventions are the customs, habits, fashion, etc. There is the custom
of wearing new clothes, preparing sweets and buying crackers for Eid,
Deepavali, Onam, and Christmas etc. At that time there is more demand for
cloth, sweets and crackers. It will happen every year. In marriage season, the
price of gold will increase.

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A study of seasonal variations is of great importance to businessmen, producers,
seller’s etc. in planning future operations.

Cyclical Variation
Most of economic and business time series are influenced by the wave-like
changes of prosperity and depression. There is periodic up and down movement.
This movement known as cyclical variation or oscillation movement occurs in
cycle. The movement occurs in every 3 or 10 years. The movement will be like
to wave. There are four phases in a business cycle. They are prosperity (boom)
recession, depression and recovery; and are shown below:
The study of cyclical variation is helpful to businessmen and economist for
framing suitable policies and stabilizing the level of business activities.

Irregular Variation
The other name for this is the random or erratic variation. It is the irregular
movements of the data over a period of time. Irregular variations arise owing to
unforeseen and unpredictable forces at random and affect the data. These
variations are not regular ones. War, flood, strike, lockouts, revolution, etc
cause these. This variation is usually a short-term one, but it will affect all the
components of time series.

Measurement of secular trend

The following are the four methods, which can be used for determining the
trend.
❑ Free hand or Graphic Method
❑ Semi-average Method
❑ Moving Average Method
❑ Method of Least Squares

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Moving Average method
The method of moving average is very simple method. We obtain trend values
with a fair degree of accuracy by eliminating fluctuation. It is also based on
arithmetic mean. In the moving average method, the average value for a
number of years of months or weeks is taken into account; and placing it at the
center of the time span (i.e., period of moving average) and it is the normal or
trend value for the middle period. It simplifies the analysis and removes
periodic variations; and the influence of the fluctuations is also reduced.
Moving average can be calculated for 3, 4, 5, 6, 7, 8 or 9 yearly period. So,
we must take moving average period from 3 to 9 for business series. The
formula calculating 3 yearly moving averages is as follows:
a+b+c b+c+d c+d +e
, ,
3 3 3
The formula for 5 yearly moving averages is

a+b+c+d +e b+c+d +e+ f c+d +e+ f + g

, ,
5 5 5

Example

Calculate three yearly moving averages of the following data

Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
No. of student 15 18 17 20 23 25 29 33 36 40

Solution
Year No. of students 3 yearly Total Moving average
1981 15
1982 18 50 16.7
1983 17 55 18.3
1984 20 60 20.0
1985 23 68 22.7
1986 25 77 25.7
1987 29 87 29.0
1988 33 98 32.7
1989 36 109 36.3
1990 40

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Measurement of seasonal variations
The following are the methods
❖ Methods of Simple Average
❖ Ratio to Trend Method
❖ Ratio to Moving Average Method
❖ Link Relative Method

Method of Simple Average

This is the simplest and easiest method of calculating a Seasonal Index. The
steps are:
➢ Average the data for each month or quarter for all the years
➢ Find the totals of each months or quarter
➢ Divide each total by the number of years for which data are given. If we
are given monthly data for 4 years, we must first get the total for each
month for 4 years and divide each total by 4 to get an average
➢ We can get an average of monthly averages by dividing the total of
monthly average by 12
➢ We must take the average of month-average as 100 and get the Seasonal
Index as follows:
Monthly average for January
Seasonal Index for January =  100
Average of monthly average

Example: Compute the average seasonal movement for the following series
Year Quarterly Production
I II III IV
1984 3.5 3.9 3.4 3.4
1985 3.5 4.1 3.7 4.0
1986 3.5 3.9 3.7 4.2
1987 4.0 4.6 3.8 4.5
1988 4.1 4.4 4.2 4.5

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Solution: Computation of Seasonal Indices
Year I Quarter II Quarter III Quarter IV Quarter
1984 3.5 3.9 3.4 3.4
1985 3.5 4.1 3.7 4.0
1986 3.5 3.9 3.7 4.2
1987 4.0 4.6 3.8 4.5
1988 4.1 4.4 4.2 4.5
Total 18.6 20.9 18.8 20.8
Seasonal 3.72 4.18 3.76 4.16
Average

3.72 + 4.18 + 3.76 + 4.16

General Average =
4
15.82
= = 3.96
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Quarterly Average
Seasonal Index =  100
General Average

3.72
Seasonal Index for the I Quarter =  100 = 93.94
3.96
4.18
Seasonal Index for the II Quarter =  100 = 105.56
3.96
3.76
Seasonal Index for the III Quarter =  100 = 94.95
3.96
4.16
Seasonal Index for the IV Quarter =  100 = 105.05
3.96