Forecasting & Time Series

The creation of plan of action because it is

not possible to evolve a system of
business control without an acceptable
system of forecasting.
Monitoring the progress of action plans
continuously based on forecasts.
Developing a warning system of critical
factors because they might drastically
affect the performance of the plan.
Type of Forecasts
Demand Forecasts
These are concerned with the predictions
of demand for products & services based
upon sales & marketing information.
Environmental Forecasts
These are concerned with the social,
political & economic environment of state
or country.
Technological Forecasts
These are concerned with new
developments in existing technologies.
Time series
A Time series is a set of numerical values
of some variable obtained at regular period
over time.
A Time series consists of statistical data
which are collected, recorded or observed
over successive increments.
A Time series may be defined as a
collection of readings belonging to different
time period of some economic variables or
composite of variables.
Objective of Time Series
To identify the pattern & isolate the
influencing factors for prediction, planning
& control of future values of the variable.
There are two main objectives of analysis
1. To study the past behaviour of data
2. To forecast the future
 Significance of Time series
1. It helps to understand the past
behaviour of data.
2. It enables the user to compare the
actual performance with the expected
performance and analyse the causes
of variations.
3. It is helpful in future operations.
4. It enables to evaluate the current
performance and ascertain the causes
in case of poor performance.
5. It is useful in planning, state
administration business and other
areas .
Components of Time Series
Secular Trend
It refers to long term variations
where the variable tends to increase
or decrease over a long period of
time.
Cycles
Upward & downward movements in
the variable value about the trend
time over a time period are called
cycles.
Components of Time Series
Seasonal
It is a special case of a cycle
components of time series in which
fluctuations are repeated usually
within a year(e.g daily, weakly,
monthly, quarterly) with a high
degree over regularity.
Irregular
Variationsare rapid changes in data
caused by short term unanticipated
& non recurring factors.
Time Series Decomposition Models
Additive Model
It is assumed that the effect of various
components on a time series can be
estimated by adding these components.
Y = T + C + S + I
Multiplicative Model
Y can be found by multiplying its
four components at a particular
time period.
Y = T X C X S X I
 Index Numbers
An Index number is a device which measure the
relative change in the level of a phenomenon with
respect to time, geographical location or some
other characteristics.

An Index number is constructed as a ratio of an

average change in price, quantity or value of an
item over a period of time in relation to its value at
some fixed point in time.
Index Number
Base Period: Base period is point of time
with which all later changes are compared
i.e the period with respect to which change
is measured.

Current Period: It is the period of time in

which change is measured considering the
prices in the base period as standard.
Types of Index Numbers
Simple Index Number: When the
variation in the level of single item is
being studied, the Index number is called
univariable or simple Index number. e.g
the index number of sugar production in
India during the last 5 years is an example
of simple index number.
Composite Index Number: If the
changes in the average level of various
items is being studied together, it is called
composite index number.
Types of Index numbers
Quantity Index: A quantity index
indicates the relative changes in quantity
levels of a group of items as agricultural
and industrial production, imports &
export consumed between current & base
period.
Value Index: A value index indicates the
relative changes in total monetary value of
an item as inventories, sales or foreign
trade between current & base period.
Characteristics
1. Specialized averages: An index number
represents a special case of an average,
generally weighted average, compiled from a
sample of items judged to be representative
of the whole.
2. Index numbers can be used for comparing
two or more data sets expressed in different
units of measurement.
3. Measure changes in the value of
variable
It represents increase or decrease in the
value of the variable
Characteristics
4.Index numbers are used to measure the
changes in some quantity which we cannot
observe directly.

5. Measure effect of changes with

respect to time or place: Index numbers
are helpful in comparing changes between
locations and in categories over periods of
time.
Uses of Index Numbers
Act as Economic barometers: Index
numbers are used to measure general
economic conditions of a country. As
industrial output, foreign exchange reserves
and bank deposits act as an economic
barometers.
Help in Policy formulation: The price
index indicates changes in various
segments of the economy. e.g by
examining the population index, the need to
formulate a policy for health & education
can be assessed.
Uses of Index Numbers
Reveal Trends & Tendencies: since an
index number describes an average change
in the level of a variable between the current
period and a base period.
Help to measure purchasing power: since
purchasing power is related to a group of
people or class rather than a particular
individual or cost of a single item.
Help in deflating various values:
adjustment of current rupee value to real
item is referred to as deflating a value series
because price increases over time.