( 1.

2X coRRELAT10N vs REGIIEss10N}
Q13. Define regression and what are the d iffere nces b etween corre lation and regression.
Answer : (Model Pape r-I. Q9(a) I Moy/June- 18, Q9(a} (OU)
Regression
According to M.M. Blair, "Regression is a mathematical measure of the average
relationship between two or more variables in terms of the original units of the data".
Difference s between Correlation a nd Re g ression escape
from
The comparison between Correlation and Regression are as follows, me

S.No Basis Correlation . Regression I

1. Meaning It means the relationship between two or
more variables which vary in sympathy so
that the movements in one variable tend
to be accompanied by the corresponding
It means stepping back or returning to 1
average value and is a mathematical
measure expressing the average
I
relationship between the variables. I

movements in others. I

2. Nature It is a measure of the ~egree and direction' It studies 'nature ' of relationship
I
~elationship between the variables. between the variables.
I It clearly indicates the cause and effect
3. Cause and Effect It does not indicate the cause and effect
I Relationship relationship between the variables. relationship between the variab les. I
It cannot say which variable is the The variable corresponding to cause I
I 4.
I
Variables
---dependent variable and which is the is taken as independent variable and
1

the variable corresponding to effect is 1

II independent variable.
taken as dependent variable. I

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 _ ..... ...-.a a a·r A ~

nt~ are~
5. Relative and lt coc llkicnt is n relative measure of the Regress1o .
n coe ffi1c1e
.
a~
Ahsolute Measures lin~ar relationship . mea sure s indicating the change ~:1 \
value of one variable for a unitchan \
in the value of the other variable. gt
1
6. Prediction It can not be used for pre dic tin g or It is very hel
pful in predicting aoo:
esti mating value. estimating value of one variable givt,;
the value of another variable .
7. Coefficients Correlation coefficients are sym me tric
Re gre ssi on coe ffic ients ate
1.e. , r = r .
""Y
)'l\ asy mm etri c i.e., bTV i= b,,.._.
-, ,,.

\ 8. Ran ge/ Limit The range of r is + 1 to - I . Th e ran ge of b and b is nc·

xy p.
. ,II restricted.
I
9. l Relationship l ts coe ffic ien t can be cal cul ate d from
Its coe ffic ien ts can not be direc l1)
I regression coefficients.
1
compared from correlation coefficieGi
l
\ 10. Drawbacks The re ma y be non -se nse cor rela tion
The re is no suc h thing in regression

Li f
•=
-
between variables due to chance.

o as --= ' L e-
 . . . . ...
. .. '

Q9. Wha t Is regressio n analysts? E><ploln regre

ssion varloblt s and types of regreulon.
Answer :
Regression Analysis
rclntionshlp bclwccn two or more v11ri:1hlcs in
Regression analysis is n technique which expresses the
on tho given vuluc of unot.hcr vnrinble.
equation fonn to estimate the value of vnrinblc hnscd
is Oulton. I lc compnrccl the heights of perso ml
Regression takes its name from studies mudc by Sir Frnnc
that the children of unusually tall perso ns rend to be
to the heights of their parents. His major conclusion wus
ts tend to be shorter than their parents.
shorter than their parents while children of sho11 paren
tall persons "regress" downward toward the
In a sense, the successive generations of off-springs from
nally for short families. But the distribution of heights
bejgbt of the population. While the reverse is true origi
bility from generation to general.ion.
for the total population, continues to have the same varia
Regression Variables
The regression variables are as follows,
or Explanatory)
1. Independent Variable (Regressor or Predictor
variable or which is used for predicting the value
The variable which influences the values of the other
of the other variable is called independent variable.
Variable)
2. Dependent Variable (Regressed or Explained
cted is called dependent variable. Regression
The variable whose value is influenced or is to be predi ression
test generates lines ofregression of the two
variables which helps in estimating the values. Lines ofreg
value ofy for any specified value of x. Similarly, line
ofy on xis the line whlch gives the best estimate for the of
estimate for the value of x for any specified value y.
of regression of x on y is the line which gives the best
Types of Regression
The various types of regression are as follows,
1. Simple Regression
two variables at a time is termed as simple
The regression analysis confined to the study of only
regression.
2. Multiple Regression
bles at a time is termed as multiple regression.
The regression analysis for studying more than two varia
3. Unear Regression
is tenued as linear regression. The equation of
If the regression curve is a straight line, the regression
e equation in variables x and y.
such a curve is the equation of a straight line i.e., first degre
4. Nonlinear Regression
If the curve of the regression is not a straight line,
the regression is termed as curved or non-linear
relation hetween variables x and v involving rerms in
regression. The regression equation will be a functional · ·
x and y of degree more than one.
ession test? State the Umlfotlons of regression
QlO. What are the appllcatlons/utllfty of regr
analy51s.
Answer :
Test
Appllcatlons/Utlllty/Importance of R~gresslon
ctions of. values of one variable for a specified value
.. . Regression lines or equations are useful in the predi _
ressio1~ test are as foJJows,
of the other variable. Some of the applioations/utility ofreg
to face LEGA L proceedings.
I Is a CRIM INAL act..Anyon e found IUllty is LIABL E
Yt'ilnl ing Xerox/Ph~tocopylng Qf this book
 & BU5UH UIB 5TATIB!tca
They both help the decisio n tn~
\. For phannaceutical firms which nrc interested 2.
prediction and re<l uc11011
• . 1·
u uncertainty. s 1n
in studying the effect of new drugs in patients.
They both arc interdependent.

2.
regression test helps in such predictions.
When price nnd demand are related, we can
·~:'? They both can be <lemonstrutcd with the hcl
of ~hs which ar_e kr~own as _scntter~L~. P
estimate or predict the future dcmnnd for n S. When the correlatro~ rs ~cgntt~c _or positive,
specified price. the regression slo!,e 1.c., 1111~ _w,t 111n the graph
3. When crop yield depends on the amount of / will also be negative or posrtrve.
rainfall, then regression test can predict crop 6. They both involve sl,"aight line rclationshi~.
yield for n particular amount of rainfall. 7 _ The scores on both variabl es reprcsc.ni
4. If advertising expenditure and sales are related, ,,. continuous scores.
then regression analysis helps in estimating the 8. - In both analysis, the error is measured in a very
advertising expenditure for a required amount ~ similar way.
9. The correlation coefficient ' r ' is linked to
of sales or sales expected for a particular
the coefficient of determination · R2 ' in the
advertising expenditure. regression analysis.
5. When capital employed and profits earned are IO. The correlation coeffici
ent ' r' takes same sign
related, the test can be used to predict profits as taken by 'b' in regression analysis .
for a specified amount of capital invested.
Limitations of Regression Analysis Linea r and Non-Linear
Some of the limitations of Regression Analysis Regre ssion
are as follows, Ql 2. What do you mean by Rnear and non-Uneor
I. Regression analysis assumes that linear regression? Distinguish between them.
relationship exists among the related variables. ·
Answer :
But in the area of social sciences, linear
relationship may not exist among the related Linear Regression
Linear Regression is a form of regression which
variables.
is used for modeling the relationship between scalar
2. When regression analysis is used to evaluate variables like 'X' and ' Y'. Under
linear regression, linear
the value of dependent variable based on functions are used to model the
data and the unknown
independent variable, it is assumed that the parameters ofmodels are estimated from the data.
Hence.
static conditions of relationship exist between these models are known as Linear Models.
them. These statistic conditions do not exist in Linear Models commo nly refers to those
social sciences, so this assumption minimizes models, where the conditional mean of variable· Y' for
the use of regression analysis in social science. a given value of variable 'X' will be an affine function
3. The value of dependent variable can be of X. A linear regression may also refer to a model,
evaluated based on independent variable by where median or other quantile of the conditional
using regression analysis but only upto some distribution of' Y' for a given value of 'X' is termed as
limits. If the circumstances go beyond the linear function ofX. Similar. to all types of regression
ljmits, then results would be inaccurate. analysis, linear regression also aims on the conditional
Q 11,l'Wrlte the relation betwee n c orrelation probabi lity distribution of' Y' for a given 'X', instead
and regress ion. of joint probability distribution of' Y' and ·.r.
Non-Linear Regression
Answer: (t~ roptt•III. Clf(a) IMay/ June-18, Q2{a) (ICU)) In the Non-Linear Regression the explained
The following points highlight the relation variable (dependent variable) change
s at varying
b ct w c en corr e I at j O 11 a d rate with a given change in the explaining variable
11
regression. Understand
1>o.·, •r (• d
m ependcnt va.riablc}. It is also known as Curvilinear
I. ( Both correla tion· and (11a11. ll•ort R
egressi on. Under non-lin ear regress ion, the
~ regression analysis are observational data are modeled by a function i.e., a
key statistical tools for ✓------ non-linear blend of model parameters and depends
studyin g the functiouw_ on one or more independent variable. Method of
!elationshjp between two (or more} variables. successive approximations are used
for fittin1) the
111ey boll1 help in determining the ~an d data. ~·he _data in non-lin~ar regression
contai~s of
strCfll:::>1.h ofrelationship between the variables error free independent vanable ' X' and its relatively
_.,,, _ - , , • · observed dependent variable 'Y'
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~ USES, -Ll~ITATION$ AM·o ·TYP~S . ; ·
Q 1l . Defin e Ind e x Number. Wh a t are Its
features and use s?
(Model Paper-II, Q l 0(a} I May/June-19, Ql O(o) (OU))
OR
What Is Index Number? Write Importance
of index numb ers.
(Ref er Only Topics : Index Numb ers, Uses/
Importance of Index Numbers)
Answer : May/June-18, Q 3(o) (KU)
Index Numbers ortont Like ~
'\,~9
AC COrding to Maslow ,
c: ->
'' Index number is a numerical value
characterizing the change in complex
economic phenomena over a period
oftime or space".
According to Corxton and Cowden, "Index
numbers are devices measuring differences in the
magnitude of a group ofrelated variables" .
According to Horace Secris, "Index numbers
are series of numbers by which changes in the
magnitude of a phenomenon are measured from time
to time or place to place".
Index numbers are numerical values or devices
or series ofnumbers that measure the average changes
in price or quantity over a period of time. Index
numbers are expressed in percentages and also they
do not have units.
Features/Characteristics of Index Numbers
The features or characteristics of index
numbers are as follows,
1. Measure the Change In Percentages
Jndex numbers measure the change in price or
quantity in terms ofpercentages such as, I0%, 20%, 15%,
25% and so on. Jncrease or decrease in value is represented
by one single figure. Like I0% increase in sales from that
previous year to current year, 30% decrease in profits when
compared to that of the last year and so on,
2. Specialized Averages
A single figure known as "Average" is used
for representing the characteristics of the complete
set of data. Average acts as a basis for compa ring
· different data sets with each other, when they have
common unit of measurement of observations. When
data sets do not have common unit of measurement,
specialized averages of index numbers are used for
tlie comparison.
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3. The Measured Changes cannot be
Observed Directly
Index numbe rs do not measure the changes
directly but it studies the relative changes or variations
in factors resulting to changes-like for measuring
changes in Export-Imports re lated factors such as
available raw materials, technology, competitors etc.
4. Measures Changes in Relation to Time
or Place
Index numbers measure change by comparing
Ote,-
the values at different time periods or at different
places like standard of living at one place is being
compared with standard of living of the other place.
Sales or revenue of current year is compared w ith that
of the previous years sales or revenue.
Uses/Importance of Index Numbers
For answer refer (!nit-II, Page No. 30, Q .No. 12,
Topic: Uses/Importance of Index Numbers.
Ql 2. What isthe Importanc e a nd limitations of
index numbers? Explain.
Answer : (Model Paper-1,QlO{a) I May/ June-19, Q7(b}(MGU))
Uses/Importance of Index Numbers
The uses/in1portance of index numbers are as !
follows,
1. Helps in Measuring Economic Conditions
Index numbers are he lpful in m easuring
fluctuations in the economic conditions. T hey ac t as a
barometer and measure the pressure ofeconomic and
business behaviour. For instance the composite index
numbe rs of fore ig n exc ha nge reserves, industri al
output and bank depos its can act as an econom ic
barometer.
2· Measuring Purchasing Power
Pun.:hasing power of a group or c lass can be
easily measured with the help of the index numbers.
As purchasing power is related with a group of people,
price index is required fo r providing overall view of
the purchas ing power of the group. By considering
earnings and expenses on purchases of a particular
group. For e xample, index numbers can measure
the fluctuations (increase or decrease) in purchasing
power of that group, over a period ohime.
 31
_.rl'.-2: Id a Nmalaars
Rev eal Tre nd and Ten den cies 4. Met hod s of Con stru cflo n
3. g
Inde x num bers mea sure the aver age chan ges lnde..-x num bers migh t by cons truc ted by usin
resu lts.
.Ul pi.an ome non. bv taki ng into acco unt the cu.rrent diff eren t met hod s whi ch give s diffe rent
- opri ate
Furt her. it requ ires a sele ctio n of an appr
~ •
·ear and basi c year '\,-alue.s. The pric e inde x give s the prob lems of
ds of form ula. othe n,is e. it wou ld resu lt in
~uctu3tions in spec ific year s. thro ugh whic h tren n whil e
in grap h. com pari son of resu lts. Due care shou ld be take
the phen ome non can be easi ly repr esen ted ld be used
sele cting a fom mln and sam e form ula shou
E,·en conc lusio ns can also be fram ed by anal yzin g
over a peri od of tjme .
these tren ds.
5. Mis use
4. Poli cy For mul atio n
It mig ht be mis used by som e dish one st
Price inde x re,·e ais the fluc tuati ons in pric es pany.
dire ctly capi talis ts who can show Jess prof its in the com
over a perio d of time . Mov eme nt in pric es the reco rd year
ation s. Curr ent year prof its are com pare d with
effects the busi ness as well as econ omi c oper wise .
s and prof its to show less prof its in the com pany . Like
Price inde x guid es the busi ness orga niza tion price s with
a new poli cy or frau dule nt trad e com pare s the curr ent year
oovernmenta1 bodi es in form ulati ng curr ent
t the the year whe re pric es were very high to show
;odi fyin g the exis ting poli cy in orde r to mee
year pric es as very high pric es.
issues that may arise due to pric e fluc tuati ons.
6. Ina ccu rate Info rma tion
5. Def latin g Var ious Val ues
t
Non - avai labi lity of accu rate and suff icien
Inde x num bers can also be used for defl ating truc tion
over all info rmat ion is one of the limi tatio n in the cons
vario us valu es such as natio nal inco me of the
of inde x num bers .
population.
7. Oth ers
6. lnftafionary and Def latio nary Ten den cies
y
g (i) Data need s to be colle cted from geog raph icall
Now -a-d ays inde x num bers are also bein
tion . scat tered loca tions .
\\idely used for mea surin g the infla tion and defla
infla tion ary and The chan ces of fake resu lts are high .
They are actin g as indi cato rs for (ii)
deflationary tend enci es. The pric e of one com mod ity mig ht diff
er
(iii)
Limitations of Ind ex Num ber s from the pric es of anot her com mod ities due
or
to diffe rent pric es fixe d by the who lesa lers
The follo v.ing are the vari ous limi tatio ns of
retai lers.
index num bers ,
In de x
Q 13. Exp la in t he va rio us typ e s of
1. Difficulty in Sele ctio n of Dat a Num bers.
It is diffi cult to inclu de each and ever y item in
take s Ans wer :
the cons truct ion of inde x as such cons truc tion
s
into cons idera tion of only the sele cted sam ple
data . Inde x num bers are clas sifie d into t.h.re-e t)'!X~
as follo ws.
2. Ran dom Sam plin g
I. Pric e inde x num hers
In the cons truct ion of inde x num bers . rand om
from
sampling is hard ly used as sele cting a sam ple Qua ntit)' inde x num bers a nd
e is not
huge population as rand om sam plin g proc edur
ples care fully, Valu e inde x num bers .
Practical . Insp ite of selec ting the sam
tion of
some errors migh t take plac e in the cons truc 1. Price Ind ex Num ber s
redu ce
indices. Ther efor e, effor ts mus t be mad e to
such errors. Pric e inde x meth od is used to com p.are the
that
price s of vari ous com mod ities of one year with
3. QualHy of Product of the anot J1er year . lt is thrth er clnssifit'd
imo two

Und er inde x num bers the qual ity of prod ucts type s. The y an." as follo ws.
time .
s~ou ld rem ain sam e duri ng a peri od of (I) Who lesa le Price Ind ex Num ber s
ns
~tss imil arity in qual ity of the prod uc ts mea
dissimilarity in price s of prod ucts whic h mak es the Who lesa le price indic es are use'd to stud y the
comparison duri ng a perio d of time less auth entic
in chan ges rhat rakes plac e in the gene ral price
~tur e. leve l of a coun try.
 ./f3 '. MET HOD S OF CON STRU CTIN G INDE X NUM BERS • SIMP LE
'
~ AND WEIG HTED INDE X "UM BER
Explain.
~ - Wha t are the various m ethods ot c onstructing Inde x numb ers?
Answe r:
The various methods of constructing index numbers are shown in the following figure,
Price Index Numbers

Weighted Price Indexes or Indices Simple Price Indexes or Indices (Unweighted Price Indexes or lndices)
Simple price index
Simple aggregative price index

Weighted oggregntive Weighted avcrnge of Simple average price relative index

price index price rclotive index

- Lnspeyrc's method
Pnoschc's method
Pisher's method

Kelly's method

Walsch's method
Marshnll Edgeworth 's method
Dorbish and Bowlcy's method

Figure: Types and Methods of Price Index Numbers

1. Weighted Price Indexes or Indices
s are allocated
At the time of constructing the weighted price indexes or indices, the rational weight
or commodities whic:1
in an explicit manner. These rational weights show the relative significance of items
are used in this weighted
are related with the computation of an index. Quantity weights and value weights
They are,
indexes or indices. Weighted price indexes or indices are further divided into two types.
1 . 1A1 -~ A __ __ _ _ , ____ ... __ ,,._,:r llABLE tofaceL EGALp roceed lngs.
3, -BUSINESS STA11STI~
(a) Weighted Aggregate Price Index If' V' isl aken as p 0 q 1, then the formula would,

In a weighted aggregate pnce · m · dex, certain

. POI = ~plql x l 00
.Poq1
weight is assigned to each and every coIIllllodity
or item of group m . accor d anc e with its Then it would be equal to Paasche's index
· h e lps m· g atbering more method.
significance. This
. . •
information and 1mprovmg accliracy of the . 2. Simple/Unweighted Price Indexes or
estimates. The following methods are used m Indices
weighted aggregate price index,
The simple or unweighted indexes or indices
(i) Laspeyre's method include the following methods,

(a) Simple/Single Price Index

(ii) Paasche's method
Single price index is computed by dividing the
(iii) Fisher's ideal method
current year price of the commodity with its
(iv) Kelly's method base year price. It is a percentage ratio which
represents the comparison of a particular
(v) Walsch's method commodity price. The general formula used
for single price index is as follows,
(vi) Marshall Edgewortb's method

(vii) Dorbish and Bowley's method.
(b) Weighted Average of Price Relative Index
In weighted average of price relative index,
value of each commodity' or item related
v.i th the calculation of composite index is
ascertained by multiplying the price of each
(b)
item with its quantity consumed. Quantity
consumed is considered for computing the
weighted average ofprice relative. The formula
for weighted average of price relative index is
as follows,
Single price index in period 'n' = p n x I 00
Po
Where,
p n = Price of the commodity in the n th year
P 0 = Price of the commodity in the base year.
Simple Aggregate Price Index
In aggregate price index, the sum of current
year prices of various commodities is divided
with the sum of base year prices ofthat various
commodities. The formula is given as follows,

I:((p1 + p 0 )xIOO)(p0%) Aggregate price index P = LPi x l 00

po• = - ~'-----'---~'-"-"- , 01 'i:./Jo
I:po% Where,
I:PV
p 1 = Unit price of a current year prices of all
r.v commodities
= Lf}J% X 100
p 0 = Sum of base year prices o f all comruoditt'
LfJo% es.
(c) Simple Average Price Relative Index
Where,
T his metho~ is an impro vem e nt over the
V (= Po%) = Base prices and quantities uggregat.e pnce method. The fonnuJa for this
detem1ining values. method 1s,

p ( = ;; x l00) = Price relotive P0 1 = L(;:xtoo)

Where,
This formula is equivalent to the fonnula of
L~peyre's index formula, n = Number of commodities included in th
computation of the index. e
f -~ ~ • a n11r:,1 1cLiccc I\ ~•n n1 ~
 = 130.39
TESTS OF CONSI STENC Y OF INDE.X NUMBE R - UNl'T 1'EST,-T IME
REVERSAL TIST,,FA~TOR R~El;IS A~ TEST AND CIRCULAR TEST

~ Explain various tests of consistency of Index numbers.

OR
Discuss the following,
(i) UnH test
(ii) Time reversal test.
(iii) Factor reversal test
(iv) Circular test.
Answer :
Price index numbers have various weighted and unweighte d index ~ethods. So, it is difficult to select
a suitable method while constructi ng an index number. In order to overcome this issue, statisticians have
suggested few tests for testing the adequacy or consistenc y of an index number. These tests include,
(i) Unit test
(ii) Time reversal test.
(iii) Factor reversal test
(iv) Circular test.

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 .. -- --·-- ·-·----
(I) Unit Test
be independent of the units under whic h
Acco rding to unit test, the formula of index numb er should
excep t simple aggregative test.
price s and quantities are quoted. All formulae satisfy this test
Time Reversal Test
selected method would ·work for both
Time reversal test is basically used at checking whether the
d give exact ratio when comp ared with
ard and backw ard or not. According to this test, the formula shoul
one point with the another i.e., for exam ple,
l
Poi = - or P01 x ?i 0 = 1
Poi

\ Qo, xQ,o = l \
time reversal test. Besid es these two,
Only two methods, Laspeyre's and Paasche's do not satisfy the
method.
the other methods of index numbers satisfies the time reversal
Fishers index method satisfies time reversal test.
Proof
"f..p,qo X "f..p,q,
"f..poqo "f..poq,

If P 10 is calculated, then the formula would be,

"f..poq1 x LPo%
Pio= "f..p,q1 "f..p,qo

Time reversal test : P 01 x P 10 = I

"f..p,% x "f..p1q1 x Lpoq, x Lpoqo = I
. Lpoqo Lpoq, "f..p,q, 'J:.p,%
proved.
Time reversal test is satisfied by Fisher's index method. Hence
Facto r Reve rsal Test
with chang e in quan tity, it shou ld
According to factor reversal test, when change in price is multiplied
increased by 3 times and its quan tity has also
give total change in value. That is, if the price of a commodity is
times than that of the forme r value . Thus the
increased by 4 times, then the total change in value would be 12
and q 1 for base and curre nt year is,
formula for commodity whole price and quantity isp0 andp 1 and%
"'£.p,q,
Po, x Qo, = ~
reversal test.
Except Fisher's ideal index, no other method satisfies the factor
Proof

LplqO X Lplql
'£poqo '£poq,

Factor reversal test : p x Q ; Pi q,=

01 ~Po%
01

p r.p, % LP1 q, 'f.q1Po r.q,p, r.pi' q, r.q,p,

o1 x Qo1 = LpoqO x Lpoq, x L.QoPo x L.%Pi = LPo% x F,qoPo

= [ 'f.p1q,
L.Po%
r = r.p, q,
LPo%
d.
Fishe r's ideal index satisfies the factor reversal test. Henc e prove
' 2i3~!'X._!~•h•Y'• ·~·-· lndex Method_>·
Q l 9. What is f\sher's Ideal Index M ethod? What are Its advantages and disadvantages?
Answer :

fisher's Ideal Index Method

A statistician named " Fisher" introduced this method, which is a geometric mean of Laspeyre's at
Paasche's methods. The formula used for this method is,

LP1 qo x LP1 q1 x 100

'i.poqo 'i.poq1

Advantages of Fisher's Ideal Index Method

The follow ing are some of the advantages of Fisher's ideal index method,

1. 1t takes into consideration both the base year and current year quantities.

2. It is based on geometric mean, which facilitates calculation of best index number.

3. lt satisfies both Time reversal test and Factor reversal test.

Disadvantages of Fisher's Ideal Index Method

The disadvantages of Fisher's ideal index method are as follows ,

1. It requires complicated computation which is lengthy in nature.

2. l1 is not suitable for general use.

,c('z_:3 . ~x Quantity Index Numbers>

 TIME SERIES - INTRODUCTION ~ COMPONENTS

QlO. What Is Time Serles? Explain the components of time series.

Answer :
Time Series
"A time series may be defined as a collection of readings belonging to different time periods, of some
economic variable or composite of variables".
- Ya-Lun Chou
Time series refers to the arrangement of statistical data in chronological order (i.e.,) according to the
time of occurrence. It represents the changing moments of variables over a particular period of time.
Time series plays an important role in business and economics. So, economists developed many statistical
techniques for analyzing time series data. However, these techniques can also be applied to study time series
of other disciplines which are not related to economics andt tatistics like natural sciences, social sciences, etc.
The functional relationship of time series can be mathematically represented as,
y = fi..t)
Where, y = Variable under consideration
f = Functional relationship
t = Times t 1, 1i, t3 , ... tn
Components of Time Series
Toe components of time series are as follows,
1. Secular Trend ( or) Long Term Movements
Trend is the irreversible movement in a time series which continues in general in the same direction
over a long period of time i..e, secular trend refers to the general tendency of the time series data to increase or
decrease over a long period of time. Trend refers to only smooth, regular, long term movement of the data and
has nothing to do with sudden and erratic movements either in upward or downward direction.
Example
(a) Upward trend: Price, incomes, population
(b) Downward trend: Deaths due to epidemics, bank interest rate, inflation rate.
y = fix)

'------ - -- -- - ---+X
Figure: Secular Trend/Long Term Movements
2. Seasonal Fluctuatlons
Seasonal fluctuations are those periodic movements which occur regularly every year and have their
origin in the nature of the year itself. Seasonal variations occur in regular and periodic manner over a span
of less than a year, i.e., during a period of twelve months and have the same or almost the same pattern year
after year. The Cause~ of Season.al Variations nre Climate in its widest se nse (natural causes) and Customs.
habits, conventions (man made causes).
Example
Time series influenced by se~sonal variations are time series re lating to agricultural production. sales
of agricultural produce, bank deposits, sales and profits in a departmental store.
IJN)'t-J: Tim e :.on es - 69
_!!
--- - - - -- - --
=f<f(~x)~ - - -- - - -- -:-
--WY:; Q l 1. Writ e the fe atur es of tend enc y.

Ans wer : (Mod el Poper -I, Q11(a ) I Moy/ June-1 8, Q,4{a)(KU))

The term trend mea ns "Ten denc y". A tren d

to the
which is also called as secu lar trend refer s
ase
general tend ency of the time series data to incre
or decr ease over a long perio d of time .

The follo wing are the featu res of a tren d/

1. --- --- - - - - -- .... x tend ency,
Figure: Seasonal Fluctuations
Cyc lica l Fluctuations 1. Long Period of Time
3.
The wav e like mov eme nts in a time series with It is nece ssary to colle ct data for fairly long
calle d
period of flu_ct~ations mo~e than one year are perio d of time in orde r to anal yze a trend . Data
poin ts
rally
cyclical vanat1ons. Cyc lical fluct uatio ns gene relat ed to som e peri od of time cann ot be treat
ed
are neith er as
exhibit semi -reg ular peri odic ity as they as a trend. But, the dura tion of the perio d main ly
al as
regular as the seas onal vari ation s nor as acci dent depe nds on the natu re of the data. For exam
ple, in
the erratic fluctuations. orde r to anal yze the trend asso ciate d with econ
omic
latio n
Example deve lopm ent of a country, data such as popu
Tim es of pros peri ty, prod ucti on, sale s, grow th, agri cultu ral prod uctio n, softw are expo
rts
, in ever ,
employment and othe r econ omi c activ ity are high etc are requ ired for at least 8 to 10 years. How
over a
times of depr essio n it is low. in case of read ings take n in ever y 15 seco nds
effec t
y =fix) perio d of 10 hour s, may suffi cien t to stud y the
of a med icine whic h regu lates hum an puls e rate.

2. Upward, Dow nwa rd or Stable Trend

r
Generally, the secu lar tren d of a serie s is eithe
data
upw ard or dow nwa rd in natu re. For exam ple,
n etc
relat ed to sales, prod uctio n, inco me, popu latio
ed to
show s an upw ard tren d. Sim ilarl y, data relat
show s
'-- -- -- -- -- -- -- -- -x deat h rate, peop le belo w pove rty line etc will
stoc k
Figure: Cyclical Fluctuations a dow nwa rd trend . How ever , for indi ces of
rd or
mark et, a long term tren d is upw ard, dow nwa
4. Random Erratic Fluctuations
stab le over a peri od of time .
In addi tion to the influ ence of long term and
d to
short term forces, ever y time -seri es is subj ecte 3. Imp act of Stable Factors
, or
occasional influ ence s, whic h may occu r just once
SC\'.eral times, but with out any patte rn or r~gu
larity. The long term tren d facil itate s in capt urin g the
stab le.
These varia tions are calle d rand om or irreg
ular or iplpa ct of som e forc es whic h are less or mor e
last a over
erratic fluc ~tio ns. A rand om vari ation may Such facto rs fluct uate stea dly and cont inuo usly
chan ge
day or last ma,ny n;ionths. a peri od of time . For exam ple, factors such as
rial disco very,
Exa"'pJ, in peop le's taste and cust oms , new mate
do not
War s, eart hqu akes , floo ds, fires , strik es, tech nolo gy chan ges and so on. Thes e facto rs
lockouts etc. ~eflect any sudd en chan ges.
y = f(x)
4. Lin.e ar or Non-Linear Trend
r
A trend can be eithe r a linea r or non linea
valu e
whe n the time peri od is plott ed on x-a'\'.is and
r if
of varia ble on y-ax is. A trend is said to be a linea
larly ,a
rate of incre ase or decr ease is cons tant. Simi
rate of
trend can be non- linea r or curv i-lin ear if the
plott ed
grow th is unev en or unpr edic table . Thus, the
-------------X poin ts on the grap h do not resu lt in a straight
line.
D"I
:.:.::.::.:.:.::.:.;;;.:: =
,~- =
- -=-~•...~.a~--~;:a~-•~-"~-•~-•~=~> •~·~..,~..~- :
~~~':~-:~-:~-
~;;.:F~;-~~-:;.:;~~~.:.:.::.:.:.:.:.::
p
_ .
.:.:.
LIM
:.:.::.:.:
ITA
.:.:~
TI0
~~~
'4S OF TIM E SE RI ES .
.
.·f ·l.
f

:~ .4 .U SE S AN
..
itations of tim e series .
Q2 6. Sta te the uses an d lim
An sw er :
Us es/ Uti lity of Tim e Series
bus ine ss but it
onl y use d by the eco nom ist and
Th e ana lys is of tim e ser ies is not log ist
and use d by the scie ntis t, ast ron om ist, geo log ist, soc iolo gis t, bio
is als o fol low ed Keep an eye on me
use s or util ity of tim e ser ies ana lys is is as fol low s,
and res ear che rs. The
st Be ha vio ur
1. It He lps In Un de rst an din g Pa
hav e tak en place in the
ers tan din g the pas t beh avi our by con sid erin g the cha nge s tha t
It hel ps in und
y pre dic t the fut ure beh avi our .
past. Wi th the hel p of pas t dat a the
era tio ns
2. It He lps In Pla nn ing Future Op ula r occ urr enc e of any
re pla nni ng by for eca stin g the eve nts and the ir rela tion shi p. If reg
It hel ps in futu t the future.
n suc h eve nt is con sid ere d to pre dic
event is the re ove r a long per iod the
Ac co mp lis hm en ts
3. It He lps in Ev alu ati ng Cu rre nt
nce wit h the exp ect ed
lua ting the per for ma nce by com par ing the act ual per for ma era tor is
It hel ps in eva . For exa mp le, If exp ect ed sal e of a ref rig
s of var iati ons if any
per for ma nce and ana lys e the rea son By usi ng tim e ser ies ana lys is the y can eva
lua te the rea son
ual sale is onl y 900 0.
10,000 for 201 1-1 2 but act
for it's shortfall.
4. It Fac ilit ate s Co mp ari so n --upon it. Bu t it is
diff ere nt per iod s are com par ed and var iou s con clu sio ns are dr71Wn
00%
The tim e series for
e on it. As stat isti cia ns are not for ete ller s, the y can not pre dic t I
bel iev
not nec ess ary tha t eve ryo ne sho uld
accurate res ults for future eve nts .
for ces wh ich wil l
cou ld be pos sib le onl y if the y inc lud e the infl uen ces of var iou s
The future pre dic tion dec lini ng fac tor s and
ate , cus tom s and trad itio ns and oth er fac tors like gro wth and
effect the series suc h as clim ed car efu lly
the pro duc tion of bus ine ss cyc les and suc h ana lys is is exa min
complex forces wh ich will effe ct - - ·
for num ber of times.
Limitations of Time Serles
as follows,
The limitations of tim e series are
situ atio ns due to ins uff icie nt data.
1. It ma y not be used/applied in all the
var iati ons .
2. tak es into con sid era tion the env iron me nta l fac tors wh ich res ult in
It
ons, wh ich nee d to be mo nito red .
3. It ma y result into errors or deviati
ran dom variations.
4. It is difficult to pre dic t cyclical and
of the tre nd line
5. ran dom var iati ons are ign ore d, for eca sts bas ed on the ext ens ion
When cyclic~! a~d
ina ccu rac y in som e cases.
•and seasonal md1ces ma y lead to
 Leaat Square M~od
What is the least square method? Wha t are the m e rits and d e rne rJts of this m eth od?
Model Poper-II, Q I l(a )
OR
What Is the least square m e thod and e xplain Its advantages and d isadvantages?
Answer : Moy/ June -1 9, Q 8 (b) (M G Ul
Least Square Method
The least square method is a statistical procedure which is used to find the best fit curve for the set of
data where different variables are involved. This method is mostly used for the time series of data in which
the relationship of two or more variables is difficult to identify. Least square method provides a trend line of
best firt in the fonn of curve in order to represents the relationship between a known and unknown variable.
Because of this reason that trend line is also called as line of best fit. This line can be a straight line trend or
parabolic trend through which sum of squares of the distance from different points is reduced or minimized.
The straight line trend equation is in the form of~= a+ bX
Where, Y denotes the trend value of the dependent variable
X denotes the independent variable.
a and b are constants.
The values of a and b are obtained by solving the following normal equations.
"'i.Y=Na+ b "'i.X
"'i.XY=a"'i.X+b" 'i.X2
Where, n represents the number of years in the series.
When "'£ X = 0 the above normal equations are simplified to
I.Y I.AY'
a=- ·b=--
N ' l:-X 2
By substituting a and b values in straight line trend equation Y = a +bX, we get the straight line equation
which can be used for estimation of future values.
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 -D
BUSINESS STA115TIC5
76
s
Merits of Least Square d,
rit s of lea st squares metho
Th e follo wi ng are the me subjectiveness.
of me as ur ing tre nd an d is free from tions
1. It is a ma the ma tic al me th od
e fro m wh ere the su m of positive and negative devia
fit sin ce it is this lin
2. It provides th e lin e of be st re of de via tio ns is the least.
ua
is ze ro an d the su m of sq for all the giv en time periods in the series.
e th e tre nd va lue s ' t' in
3. It en ab les us to co mp ut va lue s of the va ria ble for any given time period
us ed to es tim ate the
4. Th e tre nd eq ua tio n ca n be
va lue s are quite reliable. y data in case
future an d the fo rec as ted ob tai n the rat e of growth pe r annum for yearl
ich en ab les us to
5. It is the on ly tec hn iqu e wh
of lin ea r tre nd .
res
De m er its of Least Squa
res are as follows,
Th e de me rit s of lea st sq ua ion ev en if a single ne w observa
tion is added.
do fre sh ca lcu lat
1. It be co me s ne ce ss ar y to tim e co ns um ing as co mp ared with other methods .
ted iou s an d ons .
Its ca lcu lat ion s are qu ite asonal an d erratic fluctuati
2.
3. Its fu tur e pr ed ict ion s co mp
let ely ign or e the cy
er
cli
tz
ca
cu
l,
rve
se
, log istic curve etc to which mo
st of thebusiness, -
ow th curv es , go mp
4. It ca nn ot be us ed to fit gr

<
an d ec on om ic tim e se rie
PR O B
s co nf or m.
LE M S O N LE A ST SQ U A R ES M ET H O D>
an d quln ta ls) of a su ga
r fa ct ory .
'
96 BUSINESS STATISTICS-D
-~ .

P..AJJ·..r ~·s. ·r .SSA'I O·U ESTION i•ANO· A'NSWEilf'S .

~-- - \ .

' .
.P.ROBABIL ITY - MEANING AND IMPORTAN CE

Q12. What do you mean by probability? Explain the Importance of probability.

Answer : Model Paper-II, Q 12(a)

Probability
Probability can be defined as the chance or' likelihood of occurrence' of an experiment
or event. Pr.o bability of any event ranges from O to 1. The term 'probability' was coined
by an Italian Mathematician , 'Galileo '. He was the first man who measured probability
Remember me .
-- ~ -,
with conce t
quantitatively while dealing with the problems associated with rolling of dice in gambling.
The word ' probability' or ' chance' is the most common word used in our day-to-day life. For example, ..
in our daily life we use certain statements like ' Probably he may win the elections", "It is likely that India
may ,vin the match'', "She may score above 90% in the upcoming examination" etc.
A probability is a quantitative measure of uncertain events. It helps in determining the chances of the
occurrence of an event. The systematic and extensive study of probability theory was made by 'B.Pascal ' ,
' Pierre de Fermat', Jacques Bernoulli ' in mid-seventeeth century.
Importance of Probability
The various practical applications or importance of the theory of probability are as follows ,

1. It helps in taking effective decisions under uncertain conditions.

2. It reduce complications in betting and games.
3. It is useful in economic decision making. It is very helpful in situations of risk and uncertainty.

4. It helps in carrying out different types of scientific investigations.

5. The fundamental laws of statistics, viz the law of statistical regularity and law of inertia of large numbers
depends mainly on theory of probability.
6. Decision theories are based on fundamental laws of probability and expected value.
7. Toe empirical probability concept, based on experimental tests, provides scope for the application of
probabiljty to real life situations.
8. Subjective probabilities are used when it is not possible to do actual measurement. This has added a
new dimension to the theory of probability. Such probabilities are revised by the application of Baye's
rule.
9. Probability models helps in making predictions.
I 0. Probability tree diagrams helps in calculating probability values of different situations.

~ Event, Mutually ~elusive ~vents, Collecttwey Exhaiustlw

.. 4.1 .1 . ~ Independent Events, Slrn;le and·CompQund Events .

Q13. What are the key concepts of probability?

Answer : (Model l'aper•I, Ql2(a) I May/June- 18, QS(a) (KU))

The key concepts or terms of probability are us follows,

1. Experiment
An exp~riment is also r~ferred as random experiment. It is a process or activity which
leads to a pa~1cular_outcome of several possible outcomes. The outcome which is going to be derived through
random expeqment 1s n~t known until its occurence (i.e., the outcome of random experiment is not predictable).
But,_the numbe~ of possible outcomes can be known. There may be fixed or infinite number of outcomes for a
particular e:"l'enment. Outcome from random experiment may be numerical or non-mimerical in nature.

C ~ -514 PUBLISHERS.AND DISTRIBUTORS PVT~ LTD~ ·. )

it is representcu u ... .,~ r-

wi th ~
Ql S. De fin e th e fo llo wi ng su1tab1~
ex am ple :
(I) Finite an d inf ini te sets
(ii) Inclusion sets (Subset)
(iii) Equality of sets (Equal sets) .
(iv) Proper subset
(v) Universal set
(vi) Null set
(vii) Singleton set
(viii) Power set Remember me
with conc~pt_.:
(ix) Disjoint set.
Answer :
('i) Finite an d Infinite Sets
Ifa set contain finite (i.e., countable) number of
the
elements, then that set is referred to as finite set. On
other han d, if a set contains infinite (i.e., uncountable)
as
number of elements, then that set is referred to
infinite set.
Ex am ple
{2, 4, 6, 8, .... } finite set
{I, 3 , 5, 7, 9, ... , } infinite set
Note
d
Th e ord er of finite set is den ote d by n(A ) ao
the ord er of infinite set is
Tn t,Q rnrr
CYJ.

, ....... -::J
 IJHl1'-4: Prabahility II
~ Inclusion Sets (Subset)
(v) Universal Set
If X and Y are any two sets such that every
Any set which includes all the other sets defined
Jement of X belongs to the set Y, then Xis included is called universal set. It is denoted by µ or E.
~n y and X is called as subset of Y which is denoted
byX~ y or Ys;;;;X Example

example A== {xix is a natural number}

X, == {l, 5, 7, 9} B = {xix is a consonant}
x ={1,7}
2 C = {xix is an even prime number}
X2 is included in X 1 µ= {A,B, C}.
X2 s;;;;X1 (vi) Null Set
Properties of Set Inclusion A set with no element is called an empty or null
For any three sets X, Y and Z set. It is denoted by ~ or { }.
(a) Reflexive: X s;;;; X Note
(b) Transitive: (X s;;;;}) and (Y s;;;; Z) thenX s;;;; z. For any set 'X', the null set 'f and the set X
Note itself are subsets of set X.
Symmetric property is not satisfied (i.e., if X (vii) Singleton Set
c Y, then it is not necessary that Y s;;;; X). Symmetric
iroperty is satisfied only when the sets are equal.
If a set consists of only one element then that
set is referred as singleton set.
(iii) Equality of Sets (Equal Sets)
Two sets X and Y are said to be equal if and (viii) Power Set
only if X s;;;; Y and Y s;;;; X If Xis any set, then its power set consist
i.e., X == Y <=:> (X s;;;; Y" Y s;;;; X) of family of all its p.ossible subsets. Power seis
Example is denoted by p<Xl == 2x == {xix s;;;; x}.

(a) LetX= {l, 2, 3, 4, 5} Example .

Y= {1, 3, 5, 2, 4} 1. LetX= {1}
Here, X s;;;; Y and Y s;;;;X which imply X == Y.
p<Xl = { ~' { 1}} = { ~' X}
(b) LetX= { {2}, {3, 4}, 5}
⇒ i1=2
Y= {2, 3, 4, 5}
Here,X CL Yand Y CL X which imply X -:t:- Y 2. Let Y= {1, 2}

Properties of Equality Sets p<Xl= {~, {1}, {2}, {1, 2}}

For any three sets X, Y and Z = {~, {l}, {2}, S2 }
(a) Reflexive X == Y
⇒ 22 == 4
(b) SymmetricX= Y ⇒ Y=X
(c) Transitive X == Y, Y == Z ⇒ X == Z. Note
(Iv) Proper Subset If a setX contain n elements, then its power set
For any setXif Yis the subset ofX, but not equal contain 2" elements.
to X, then Y is called proper subset ofX. It is denoted by (Ix) Disjoint Set
Ycx.
n Y-:;:. X) If X and Y are two sets, which doesn't have any
Symbolically ( Y s;;;; X
Example common elements (i.e., if X n Y = ~) then these sets
are said to be disj,oint sets.
X== {l, 2, 3, 5, 7}
Y=={3,5,7} A collection of sets is said to be disjoint
collection if there ex~st pair of disjoint sets. The
YkX
elements belonging to disjoint collection are said to
Y;tX ⇒ YcX.
be mutually disjoint.
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 4. It helps in carrying out a1ne r~11L lYJ-1_._, ~ v • ~ -· _ _
. od Jaw 01 m e rn a o t large nu , _
fsta tisti cal regu larit y a 1111
· ·
The fundamental laws of stat1 st1cs , viz. the law 0 Vl!t1
5. .
depends mainly on t l1eory o f prob abil ity. d l
.
f roba bi ltty an d exp ecte va ue.
.
D ec1s1on theories are based on fund ame ntal laws o_ p
. .
6. 1 test s prov ides sco pe for the apphcation or
The empirical probabili~y c~ncept, base on exp ernn enta
d '
7.
Tty .
pro ba b i i to real life s1tuat1ons. . d actu al mea sure men t. Thi s has added
. . t poss ible to o
b bilit ies are revi sed by the app I"tcatt.on of Baye'a
8. Subjectiv e probabilities are used whe n it is no h
new dimension to the theory of probability. Sue 1
pro a
rule.
9. Probability models helps in mak ing pred ictio ns.
T lues of diff eren t s itua tion s.
10. Probability tree diagrams help s in calc ulat ing
prob abt Ity va • .
.
Exp erim ent , Eve nt, Mu tua lly Exc lus ive E ent s eon ect w e ly Exhal.lStrJe
4.1 .1 Events, Ind epe nde nt Events, Sim ple and ~m pou ' nd Eve nts.

Q13 . What are the key con cep ts of probab

ility?
Answer : (Mod el Paper-I, Q 12(a) I May/ June - 18,
Q5(a ) (KU) )
The key conc epts or term s of prob abil ity are
as follo ws,
1. Exp erim ent
An expe rime nt is also refe rred as random expe
riment. It is a proc ess or acti vity whi ch
leads to a particular outcome of several possible
outcomes. The outc ome whi ch is goin g to
rand om experiment is not known until its occurenc be derived tbrougr
e (i.e., the outc ome of rand om exp erim ent is
But, the number of possible outcomes can be know not predictable)
n. The re may be fixe d or infi nite num ber of
particular experiment. Outcome from random expe outcomes for ,
rime nt may be num eric al or non -num eric al
in nature.
( ~ 51 4 PUBLISHERS AND DIS TR IBU TO RS
PVT. LT D
IJ1fl'l'.-4: Probability 97

f,cat11Ples Example
some of the examples of random experiment are From a pack of cards, drawing a red card and
as follows, drawing a queen are the two events. These two events
(i) Drawing a card from a group of shuffied curds. can occur simultaneously while drawing a red queen.
Hence, these two events are said to be non-mutually
finding the chance of getting 6 when a dice is exclusive events which can occur at the same time.
(ii)
thrown.
6. Collectively Exhaustive Events
outcome
2. Collectively exhaustive events are those events
The result of a random experiment is usually
whose totality contains all the potential outcomes of a
referred as an outcome.
random experiment.
example
Example
If we toss a coin, the outcome may be a head
or 3 tail. In such a case, number of outcomes = 2. When a dice is thrown, the total possible
outcomes are I, 2, 3, 4, 5 and 6 and thus the number of
3. Event
exhaustive cases is 6.
An event is a possible outcome ofan experiment
or a result of trial. Basically there are two types of 7. Equally Likely Events
events. Simple and compound event. Events are considered as equally likely events
0) Simple Event .when the probability of occurrence of all the events
The probability of happening or non-happening is equal. These events are also called as 'equally,
of a single event is considered as a simple probable events'.
event.
Example
Example
If a coin is tossed, the two possible outcomes
When we are selecting two black coins from a
box containing l Owhite and 5 black coins. are head and tail. The probability of their occurrence
(ii) Compound Event is equal (i.e, .!._)
2
If the joint occurrence of two or more event
8. Independent Events
is considered then it is known as 'compound
event' or ' composite event'. Two or more events are considered as
Example independent events, when the outcome of one event
does not influences and is not influenced by the other
A box containing 5 white balls, 3 black balls
and 8 red balls, when we draw 2 white balls in event.
first draw, 2 black balls in second draw and 5 Example
red balls in third draw.
When a student has appeared in physics and
4. Mutually Exclusive Events
chemistry examinations, his marks obtained in physics
. . When two events cannot occur simultaneously is independent of the marks obtained in chemistry.
gle trial then such events are called as mutually
in a sin_
exclusive or incompatible events. 9. Dependent Events
Examples Dependent events are the events in which the
(i) occurrence or non-occurrence of one event in any one
When a single coin is tossed either a head or a
tail ' trial influences the probability of occurrence ofother
. can turn up, both cannot come at the same
time. events in other trials.
(ii) ·
· o f' time,
At a singl c point a person can be alive Example
or dead.
5. When a card is drawn from a pack of playing
Non-mutually Exclusive Events cards and is not replaced then this changes the
sin ~hen two events can occur simultaneously in a probability of occurrence of the second card. Here,
1 ·
. then suc h events are said to be non-mutually
exclg e trial probability ofoccurrence ofsecond event is dependent
US1ve events.
w on the occurrence of first event.
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opy ng of this book Is a CRIMINAL act. Anyone found guilty Is LIABLE to face LEGAL proceedings.
 .-,· "u~ATfO.N-· ·A e,camPle-:l
'.4~3 .- =•·•NAt,oN' ,, - A factory owner has received three disti .
new machines A, ~ and C and these can be : ~ble
n detail dbout permutations. ways in the followmg ways, ged m 6
I I
Q20. EXPIan 7
ABC, ACB, BAC, BCA, CAB, CBA
Answer :
From the above, it should be nOt e d th at each
Permutations arrangement h as three elements and
Permutations refer to_ different arrangements · no e1ement
appears twice.
. . set where tn all the elements are
of obJects m a . . Example-3
. . • h ble In these arrangements, an individual
d1stmgms a · b' . .
. • trepeated Jfsome o ~ects are sum 1ar, then The three distinguishable machines des1gnated
.
ob~ect1s no .·
the permutations w1ll be affected. as A, Band
. C can be arranged on assembly 1·
memt• he
In other words, the different ways in which following manner.
First Second Third Passed
·ects (r) are selected and arranged from total
some o b~ . ,, . ,, space space space arrangement
number of objects (n) 1s called as Pennutatlons .
--==::::::::::B--C ABC
Example-1 A-a.__-C - - B ACB

~ ~ ==== ~
If there are five different pens and three boxes, BAC
the number of arrangements of three pens in three Origin B --==:::::::::: BCA
boxes selected from five different pens is called as ~ --==:::::::::: A - - B
C-=:;;..--B--A
CAB
CBA
permutations.
The better way to see how three spaces can be
The number of ways of arranging ' r' objects
filled by the three different machines is,
taken from 'n' different objects can be given by,
1st 2nd -. rd
Spaces .)

"P =-11_!- Ways 3 2 I

r (11-r)!

Where, 'n!' is the number of ways of arrano-ino- Applying the multiplication rule, the three
t:> t:>
'n' objects. spaces can be filled in,
3 x 2 x 1 =6 ways, where repetition is not
In!= n(n - l)(n - 2)(n - 3)... j allowed.
[·: n! is called as 'n'factorial, 0! is equal to l] Q2 1. Explain In detail about combinations.
For example, Answer :
5! = 5 x 4 x 3 x 2 x I = 120 Combination
6! = 6 X 5 X 4 X 3 X 2 X I = 720 . A combination refers to a selection of objects
irrespective of their arrangement. The number of
d"ffi From the ab ove example, for calculating
. the c?mbinations of objects in different ways is entirely
d~ffierent ways of arranging of three pens from 5
different from the number of their pennutations.
1 erent pens in three different boxes
' The total number of possible combinations of
"P - n! a set of objects is always taken as l .
,-~
For example, the possible arrangements from
Here, the set of objects 'a' and · b' are ab and ha. Irrespective
of their order ab is same as ba, there is only one
n= 5
possible combination for this set.
r=3
The nwnber of ways of selecting ' r' objects
sp = ~ 5! from 'n' different objects irrespective of their
3 - -
(5-3)! - 2! arrangement is called as combinations.

=~ It is denoted by "C,
. l 2xl = 60
"
diffi
n ·60 ways thre . "C = n!
erent pens can be arr e pe~s selected from five r r!(11 -r)!
~ g e d in thre~ cHfferent box:es.
t. l%,. ,. ,___..., _____,... L-~----··=-~nf ~hic hnnk is a CRI
 ns and assum ption s.
Q9. What Is Blnom lal distrib ution ? State Its Impo rtanc e, appll catlo
Model Paper-I, Q 13(a)
Answer :
sinomial Distribution
by a Swiss Mathe matici an. 'Jame s
Bi_~~mial di str ibuti~n.is a discrete probability distribution developed
1t is used for finite or limite d numb er of
aernoulh m i 7oo. Thus, it is also known as Bernoulli distribution.
'n' and 'p'.
trials 'n ' . It produ ces succe sses and failw-es based on two param eters
distribution which are explai ned
Binomial diS tr ibutio n satisfies two essential properties of probability
as follows,
(I} f(x) ~ 0
positive.
Binomial distrib ution fulfills this requir ement as 'n' and 'p' both are
Therefore, ncr pr qn-r are all positive.

I
So f(x) ~0 I
(ii} rt(x) = 1
Binomial expan sion of (p + q)" helps in fulfilling this requirement.
['.'p= 1 - q]

=(p+ qy ⇒ (1-q+qy

= (1 y = I ⇒ / :E/(x) = 1 /
Importance of Binom ial Distribution
The following points highli ght the impor tance of binomial distribution,
variable.
1. It is an extens ively used proba bility distribution of a discrete rando m
nce.
2. It plays a vital role in the functions of quality control and quality assura
3. It is used in manuf acturi ng units for defective analysis.
nies.
4. It is also used in servic e organizations like banks and insurance compa
two types of possib le outcom es.
5. It characterizes the outco mes of each trials in the process on one of
independent comp ared to previo us
6. The possibility of outcom e of any trials does not change and remains
trials.
Applications of Binom ial Distribution
Binomial distribution is applicable in case of repeated trials such as,
partic ular period of time.
I. Number of applications received for a junior assistant post during a
2.
Number of births taking place in a hospita l.
a company.
Number of candid ates appearing for the screening test conducted by
3.
es namely, succes s and failure .
All the trials are statistically independent and each trial has two outcom
dings. ·
act. Anyone found guilty Is LIABLE to face LEGAL procee
\V~ ing : Xerox/ Phntnc nnvine of this book is a CRIMIN AL
 • vv " v. l / L = 17 .2 · - • -...
1
'-purc th at there are '3' or less peop le were rice
cons umer s.
:: 17.
- ; ., ... t \.' -I
• POI SSO NDl $TR I ' ,·M
~- - · · · ·,( · · . .
.... IIORTANCE, . ·. \
Pl8>PERI IES ~ ~ I • - • • • • •· '.

~
_,.,. '

-/ ,l

Q l 7 Define polsson distribution and state ::.\

.\
Its
• · Impo rt anc e . .;

Answer :
Poisson Distribution

Pois son distr ibuti on is a discrete probability distributi

on for countably infinite trials.
Poisson distr ibuti on is nam ed after Fren ch mathemat
ician, 'SIMEON DENIS POISSON '--- -... .- - r:l
in 1837. It is used whe n the prob abili ty of success
of any individual event is very small.
The aver age or mea n of pois son distribution is given
distribution is also give n as 'A.. by "-· However, the single parameter of poisson

Pois son distr ibut ion can be used generally to appr

oximate the bino mial distr ibuti on whe n ~ n ' value
is large (i.e., n ~ oo) and 'p' valu e is very small (i.e.,
p~ o)
Alw ays the sum of _infinite probabilites in poisson
distribution is 1 i.e.,
I P(Q )+P {l)+ P(2 )+ ... +P(o o)=1 \
Imp orta nce of Poisson Distribution
Foll owin g poin ts high light the importance of Poisson
Distribution,
1. It help s to desc ribe the complete randomness and
independence of events.
2. It helps to mak e unlim ited num ber of trials .
3. It help s to find out the probab 1.11.ty of events occurring in a fixed interval of time.
Wam ing : Xero x/Pho tocop ying of this book RIMI NAL act. Anyone found guilty is LIAB LE
Is a C to face LEGA L proceedings.

b
8. It helps businessmen to make 1orecas L::. .i v , .. .... . _
sson distribution.
0 f pol
appllca ti ons
Q1 8. Explain about the properties and
OR
Moy/ June-19, QlO (a) (MGU)
n.
Explain the features of Poisson distributio
Poisson Distribution)
(Refer Only Topic: Properties/Features of escape
from
Answer : me
ution
Properties/Features of Poisson Distrib
sso n dist ribu tion ,
Fol low ing are the properties/features of Poi
e interval has no
occ urre nce of the eve nts is inde pen den t i.e., the occ urre nce of an eve nt in a tim
1. The
nt in the sam e or any oth er inte rva l.
effe ct on the occurrence of the second eve
rval.
lly, an infi nite num ber of occ urre nce s of the eve nt mu st be pos sibl e in the inte
2. The ore tica
a giv en inte rva l is dire ctly pro por tion al to
the length
ility of sing le occ urre nce of the eve nt in
3. The pro bab
of the interval.
urre nce s of the event
rval, the pro bab ility of two or mo re occ
4. In any extremely small portion of the inte
is negligible.
i.e.,
omi al dist ribu tion, pois son dist ribu tion also satisfies the two ess ent ial properties
Lik e bin
(i) f(x) ~ 0 and
(ii) Lf(x) = I .
5. It is a discrete probability distribution.
6. It is positively skewed to right.
Applications of Poisson Distribution
. S001e
is mos tly app lied in bus ines s m nce and o ti s rese arch
Poisson distribution • ana gem ent scie per a on · ,
lica tion s whi ch are obs erve d in ou d .1 r~ is used area.1
of the examples of app r 81 Y he wh ere poi sso n dist ribu tion
follows, i
I
r
(i) Number of calls received at a call centre. >

the p •
(ii) Number of printing mistakes occ urred on ages m a boo k.
(iii) Num ber of trains arrived at railway station.
k.
(iv) Number of persons join ing a queue at a ban
Q24. What Is Normal Distribution? Write the Importance and applications of normal dlsfribution.
Answer :
Normal Distribution
Normal distribution was first discovered by 'Abraham Demoivre' in 1733 as a limiting case ofbinomial
distribution. It was later developed by LAPLACE and GAUSS. It is also known as ' Gaussian distribution' as
the credit goes to German mathematician 'Karl Friedrich Gauss'.
In normal distribution, the probability of occurrence of values of random variables are calculated within
a range or interval whereas the probability of a particular value cannot be calculated and is always assumed to
be zero. The probability distribution used mostly for dealing with quantities whose magnitude is continuously
variable is normal distribution. Hence, it is called as 'Normal probability distribution'. It plays a prominent
role in statistical theory and practice.
It is an approximation to binomial distribution whether p is equal to q or not. Binomial distribution
tends to form a continuous curve when ' n' becomes large at least for a certain range.
( @ SIJiPUBLISHERS AND DISTRIBUTORS PVT. LTD. )
 ~ Thus, the limiting frequ -- .
' 'h ency curv
btait1ed w hen n as large Value . e Which is (
oortllal frequency curve' or 'the no is called as 'the
fl The two parameters of normnnla~ curve'.
, 2, ( a d1strib t·
•~t' (mean) an d cr variance).
•
- u ion are
Always the value of rand
.
.
om vanabl '
w1'thill certain range and has no p art·tcular e X' lies
'
(i
Thus, - oo < X < oc:i va1ue.
'Nonna!
frequency
curve'

Ta ils extend indefinite)

- - - - - - - -~-::.J y
Mean= Mode = Median

importance of Normal Distribution

Following
. . . points highlights the importance of
normal d1stnbut10n,
1. Many of the distributions like Binomial
Poisson etc., can be approximated by normai
distribution under suitable condit_ions.
2. It is used to fit a distribution under certain
conditions.
3. Many ofthe distributions of sample statistics i.e.,
the distribution of sample mean, sample variance
etc., tend to normality for large samples.
4. It is used for large applications in statistical
quality control in industry for establishing
control limits.
5. It is widely or extensively used in the entire
theory of small sample tests in which it is
assumed that the parent population from which
the samples have been drawn follow normal
distribution.
6- It plays a major role in appropriate decision
making under sampling theory.
7· Most of the sampling distributions of stati 51 i~s
such as students t-distribution, Snedecor 5
F-distribution Fisher's Z-di st ribution and
Clu. square d1stn
. , 'b ution;
. ad'ust
J into normal
distributions for large degrees of freedom.
APPllcatlons of Normal Distribution
· minent role
. Normal distribution plays a pro f
in stat·tsttcal
. 11
theory as we as pr, actical area o
applications. Some of the applications are, _
1, I . . I bservations tor
t 1s used in astronom1ca 0

analyzing the measurement errors. f

2· It is used to determine the blood pressure
0

3 human body. . ht 0 f an
lt is used to determine th e heig
individual.
·~ .. ,~ .., CRIMINAL act._
 P[ l20 < SII < 160] = 0.7868.

.3.2 Charac teristic s of Normal Distribu tion

Q28. What Is normal distribution? State fts characte ristic s. Understand

OR
What Is normal distribution? Write fts any flve features .
Answer : (Model Paper-II, Q13(a) I May/ June-18, Q6{a) (KU))

Normal Distribut ion

In normal distributio n, the probabilit y of occurrenc e of values of random variables are calculated writ:
a range or interval whereas the probabilit y of a particular value cannot be calculated and is always assumed:
be zero. The probabilit y distributio n used mostly for dealing with quantities whose magnitud e is continuo~1•
,·ariab]e is normal distri bution. Hence, it is called as 'Normal probabilit y distributi ony. It plays a promil;~
role in statistical theory and practice.
Cha racteristics/Prop erties of Normal Distribution
Following are the characteristics/features/proper ties of normal distributio n,
J. The normal curve is ' bell-shaped ' and symmetric al about the mean (skewnes s= 0). If the curve is fokie-:
along its central vertical axis the curves either side of the axis would coincide.
2. The height of the normal curve is maximum at its mean. Hence, the mean and mode coincide. Thus. .:
normal distribution, mean, mode and median are equal.
3. The height of the curve is maximum at its mean but reduces as it goes towards either of the direc!lt'1
but never touches the base. Hence, the curve is known as ASY11PT OTIC. The range in unlimitedil

(
infinite in both the directions.
~ S14 PUBLISHERS AN D DISTRIB UTORS PVT. LTD. ==
 u,nT-5: T he ar et ic al
Distril,ufiana
:- -- :- -- - - - - - - -. - - - - - -_!14~'.5
x ~im -~
;~in
~~u~m; po ~ ::no:= :7 "
rmal cu rve has only one mode and ,r kn o,,;vn as ·unimodal
~s~ th~e e
;r; ~
iis o~n* ly ~ o~n;e ~m;;;a~. t, the -
_: .:- ~A . . . t (o r } µ== er.
4.
Th e po
.
m ts o f in fl ex io n 1.e. ' th e p om s w he re the ch ange m·
cu rv at ur e oc cu rs ar e x ± c;
· . · b Jes where as no rm al di st rib ution has
). e va ri
.
ab le s us ed in bi no m ia l and p 01sson are di seret e vana
6 Th
· co nt.in uo us ra nd om variable. .
qu ar til es ar e at sa m e d'tstance fr om the median.
The first an d th ir d
7. ws,
r th e no rm al cu rv e is distributed as follo
8. The ar ea un de
ve rs 68 .2 7% area
(i) M ea n± I cr co
ve rs 95 .4 5% area
(ii) M ea n± 2 cr co
(ii i) M ea n± 3 cr
co ve rs 99. 73 % ar ea tive.
st ri bu ti on m ay be negative, zero or posi
9. Mean of no rm al di r no rm al probability distribut
ion is l .
no rm al cu rv e fo
10. The total ar ea un de r th e
o n (A re a s M e th o d O nl y)
a l D is tr ib u ti
F it ti n g A N o rm
ut ton.
th e no rm al curv e an d norm af dfstrfb
e ar ea un d er
Q29. Write ab o u t th ing
no rm al pr ob.ab i lity distrib ution show
Answ er : e of st an da rd . ·
· .r.1ound from th e ta' bl ndom va na bl.e.. .
d
A re a un er an y no rm a1 cu rv e 1s
of til e normaJJy distributed ra po ss ib le to draw
d va 1 ue . rv es . H en ce 1t 1s not
th an y al cu
the area betwee n e m ea n an d h e di ff er en t no rm rve is transfom1ed into a st an da rd iz ed
. e normal cu
S·
er en t va lu es of µ an cr w e a~ hu s th
then 0 mce fo r di ff r va ri ou s va lu es of µ and cr. · '
ur ve s fo