Module 5: Index Numbers & Time Series

Index numbers is an indicator of the level of phenomenon at a specific point of time in

comparison with its level at some other point of time. Index numbers may be of varying
price, production, growth rate, imports, exports, cost of living, etc. Generally, index numbers
of various economic activities are found useful. For economists, Index numbers are of use at
every stage of planning, policymaking, decision making, etc. And so index numbers may be
very well be called “Economic Barometers”. Just as barometers measure atmospheric
pressure, Index numbers measure changes occurring in economic field.
An index number is a statistical device designed to measure relative level of a group of
related variables over a period of time or space. In other words, it is a number which
expresses the overall level of a group of related variables at a given time called “Current
Period” as compared to the “Base period”. Generally Index numbers are expressed in
Percentages. Thus if Index number of wholesale prices of food articles in 2005 as compared
to 1990 is 150, the implication is that the overall level of wholesale prices of food articles in
2005 is 150% of the level in 1990.
Index numbers can very well be calculated for individual variables. For instance, if the price
of a commodity is Rs.5/- in 2001 and Rs.8/- in 2005, the index number of price for the year
2005 with respect to the base 2001 is P = (8/5)*100=160.That is the price of the commodity
in 2005 is 160% of its price in 2001. Here P is called the Price relative.
Thus Price relative is the price in the current year expressed as a percentage of the price in the
Base year. Thus p0 and p1 are the prices of a commodity in the base year and current year
respectively, the price relative is –
p1
P = ×100
p0 .
Generally, Index numbers are of three types.
1. Price index number
2. Quantity Index number
3. Value Index number.
Various price index numbers which are in common use are Wholesale Price Index number
(WPI), Consumer price Index Number (CPI), etc..The price index number may be of different
group of commodities like Food articles, Laboratory equipments, etc.
Price Index numbers indicate the general level of prices of articles in the current period as
compared to that of the Base period.
Quantity Index numbers are index numbers of quantity of goods manufactured by a firm,
quantity of goods imported or exported, quantity of agricultural production, etc..
Value Index numbers are the index numbers of the total money value of transaction taking
place.
Note:
1. Index number for the base year is always taken as 100.
 2. Price index is 125 means price level in the current year is 125% of the price level in
the base year.
3. Average price level in 2005 is double the average price level in 1990 means Index
numbers of price for 2005 is with base 1990 is 200.
4. Index number for 2004 with base 1980 is 325 means average price level has increased
by 225% from 1980 to 2004.
Uses of Index Numbers:
1. Index numbers are useful to governments in formulating policies regarding economic
activities such as taxation, imports and exports, grant of licenses to new firms, bank
rate etc.
2. Index numbers are useful in comparing variations in production, price, demand,
supply etc..
3. Index numbers help industrialists and business men in planning their activities like
production of goods, their stock, costing and marketing etc..
4. Consumer price Index numbers are used for the fixation of salary and grant of
allowances to employees in a factory.
5. Consumer Price Index numbers are used for the evaluation of purchasing power of
money.
Limitations of Index numbers:
1. While constructing the Index numbers, some representative items alone are made use
of. The index numbers so obtained, may not indicate the changes in the concerned
fields accurately.
2. As customs and habits change from time to time, the use of commodities also vary.
And, so it is not possible to assign proper weights to various items.
3. Many formulae are used for the construction of index numbers. These formulae’s give
different values of the index.
4. There is ample scope for bias in the construction of Index numbers. By altering the
price quotation or improper selection of items, Index numbers can be manipulated.
Steps in the construction of Index numbers:
1. Defining (Stating) the purpose of the Index number.
2. Selecting the Base period.
3. Selecting the Items.
4. Obtaining Price Quotations.
5. Selecting the appropriate system of weights.
6. Selecting the appropriate formula.

1. Defining (Stating) the purpose of the Index number: At the very outset, the purpose of
the Index number should be decided. As different Index numbers are useful for
different purposes, the purpose on hand may need a particular Index number. A clear
definition of purpose will help in the selection of right index number. While
constructing the Index number the selection of items, base period, weights etc.
depends mainly on the purpose. Absence of clear definition of purpose often leads to
construction of an unsuitable index number.
2. Selecting the Base Period: While constructing an Index number, appropriate Base
period should be selected. The base period should be economically stable. There
should not be any abnormal variations. The period should be free of wars, floods,
famines, etc. It should not be too distant from the current period. Again, the
consumption pattern during the two periods should not differ much. Depending on the
situation, fixed base index number or chain base index number may be preferred.
3. Selecting the Items: Selection of items is mainly based on the purpose of the Index
number. Items differ with the purpose. For Eg: A wholesale price Index number
requires items which are transacted at the wholesale market. A consumer price index
number requires items which are consumed by the particular group of people.
However, in a Consumer Price Index number items differ with the habits, customs
and standard of living. Generally, there are many items that could be included in the
Index number. But, the list can be reduced by selecting representative items only.
4. Obtaining Price quotations: After selecting the items for constructing an Index
number, price quotations for these items should be obtained. Since price is likely to
vary from place to place, it is better to obtain price quotations from different places
and also from different agencies. Then the prices should be averaged. Again, prices
are likely to vary during the span of the base period and during the span of the current
period. Hence, it is better to collect price quotations at regular intervals. These
quotations should be averaged and the averages should be used in the construction.
5. Selecting the appropriate system of weights: The items considered in the constructing
Index numbers often have varied importance. According to their importance, weights
are attached to the items. Mostly, these weights are quantities in the base period, those
in the current period or those in any other period. Sometimes, a combination of
quantities in different periods may be considered as weights.
6. Selecting the appropriate formula: The selection of formula is mainly based on the
availability of data. Depending on availability of data regarding quantities,
Laspeyre’s, Paasche’s, Fisher’s or any other Index number is calculated. While
selecting the formula, care should be taken to see that maximum use of available data
is made.
Price Index Numbers: The various Price Index numbers which are in common use are –
1. Unweighted Price Index number
2. Weighted Price Index number.

1. Unweighted Price Index number: There are two types of Unweighted Price index
number. They are –
A. Simple average of Relatives
B. Simple aggregative Index number.

A. Simple average of Relatives: Here, an average of the price relatives is calculated. It

may be the arithmetic mean or it may be the geometric mean.
The unweighted A.M Index number is,

P01=
∑P
n where P denotes the Price relative.
The unweighted G.M Index number is,
 P01=anti log (∑ ) .
log P
n
It is customary to denote the base year by ‘0’ and the current year by ‘1’. Thus P 01 is
the price Index number for the current year with respect to the base year.
B. Simple aggregative Index number: Here the current year aggregate value is expressed
as a percentage of base year aggregate value. The Index number is –

P01 =
current year total
×100=
∑ p1 ×100 .
base year total ∑ p0
Problems:
1. From the following data, Calculate
i) The unweighted A.M Index number.
ii) The unweighted G.M Index number
iii) The unweighted aggregative price Index number for the year 2004 taking 1990 as
the base year.
Price in Rs/Quintal
Commodity
1990 (p0) 2004(p1)
Rice 600 1350
Wheat 320 992
Sugar 1040 1560
Dhal 540 3240

Soln:
Price in Rs/Quintal Price Relative Log P
Commodity
1990 (p0) 2004(p1) P = (p1/p0*100)
Rice 600 1350 225 2.3522
Wheat 320 992 310 2.4914
Sugar 1040 1560 150 2.1761
Dhal 540 3240 600 2.7282
∑ p0 =2500 ∑ p1 =7142 ∑ P =1285 ∑ LogP =9.7979

Ans: P01=321.3 by A.M, P01 = 281.5 by G.M, P01 = 285.68 by simple aggregative method.
2. Compute the Price Index number for the year 1997 and 1998 for the following data by
using a simple average of price relative method by i) Arithmetic Mean ii) Geometric
Mean. Hence the compare the price levels in 1997 and 1998.
Prices (in Rs)
Items
1991(p0) 1997(p1) 1998(p2)
Bricks 10 16 18
Timber 20 21 22
Board 5 6 7
Sand 2 3 5
Cement 7 14 21
Ans: P01(1997) = 147, P01(1998) = 196 by A.M.
P01(1997) = 143.30, P01(1998) = 184.40 by G.M.
Weighted Price Index number: While constructing the various unweighted Index number,
equal importance is given to all the items. But in practice, it can be seen that different items
have varied importance. Though Rice and sugar are used everyday, the quantity of rice used
is much more than the quantity of sugar used. And so variation in the price of rice should
have greater impact on the Index number. Thus, while computing Index numbers, items
should be considered with appropriate importance. This is done by assigning weights to
various items. Generally the quantities (used, sold or produced) are regarded as the weights.
Depending on the availability of data, base year quantities or current year quantities or both
are regarded as weights.
There are two types of Weighted Price Index numbers. They are
a. Weighted average of Relatives.
b. Weighted aggregative Index numbers.
a. Weighted average of Relatives: Here, appropriate weights are assigned to the various
items and a weighted average of the concerned relatives is calculated. The weighted
A.M Index number is –
P01=
∑ wP
∑w
The weighted G.M Index number is –

P01 =anti log

[ ∑ w log P
∑w ]
b. Weighted aggregative Index number: The various weighted aggregative Index
numbers in common use are -
1. Laspeyre’s Price Index number.

P01=
∑ p1 q 0 ×100
∑ p0 q0
Here, the weights assigned are the base year quantities.
2. Paasche’s Price Index number.

P01=
∑ p 1 q1 ×100
∑ p0 q1
Here, the weights assigned are the current year quantities.
3. Marshall-Edgeworth Price Index Number.

P01=
∑ p1 ( q 0 +q 1
2 ) ×100=
∑ p1 q 0+ ∑ p1 q1 ×100
∑ p 0 q 0 + ∑ p 0 q1
∑ p0 2( q 0 + q1
)
Here, the weights assigned are the average of the base year and current year
quantities.
4. Dorbish- Bowley Price Index Number.
 This is the arithmetic mean of Laspeyre’s and Paasche’s Index number. It is –
P ( Laspeyre ' s)+ P 01( Paasche ' s)
P01= 01
2

P01=
1
2 [ ∑ p1 q 0 + ∑ p 1 q1
∑ p 0 q 0 ∑ p 0 q1 ] ×100

5. Fisher’s Price Index number.

This is the Geometric Mean of Laspeyre’s and Paasche’s Price Index number. It
is-
P01=√ P01( Laspeyre ' s)×P01 ( Paasche ' s)

P01=
[√ ∑ p1 q 0 × ∑ p1 q 1 ×100
∑ p 0 q 0 ∑ p0 q 1 ]
.
Problems:
1. Calculate Laspeyre’s, Paasches’s, Marshall-Edgeworth, Dorbish-Bowley and Fisher’s
Price Index number for the following data.
Price(in Rs./Quintal) Quantity sold (quintals)
Item
Base Year(p0) Current year(p1) Base year(q0) Current year(q1)
Rice 400 850 100 120
Wheat 320 690 20 60
Sugar 720 1600 10 10
Dal 720 2100 10 20

Soln:
Item p0 p1 q0 q1 p0q0 p0q1 p1q0 p1q1
Rice 400 850 100 120 40000 48000 85000 102000
Wheat 320 690 20 60 6400 19200 13800 41400
Sugar 720 1600 10 10 7200 7200 16000 16000
Dal 720 2100 10 20 7200 14400 21000 42000
∑ p0 q0= ∑ p0 q1= ∑ p1 q 0= ∑ p1 q 1=
60,800 88800 135800 201400

2. For the data given in Q.No.1, find the Laspeyre’s, Paasche’s , Marshall-Edgeworth, Dorbish-
Bowley and Fisher’s Quantity index numbers.
Laspeyre’s Quantity Index number.

Q01=
∑ q 1 p 0 ×100
∑ q0 p 0
Paasche’s Quantity Index number.

Q01=
∑ q1 p1 ×100
∑ q0 p 1
 Marshall-Edgeworth Quantity Index Number.

Q 01=
∑ q 1 p 0+ ∑ q1 p1 ×100
∑ q0 p 0 + ∑ q 0 p 1
Dorbish- Bowley Quantity Index Number.
Q 01( Laspeyre ' s )+Q 01( Paasche ' s )
Q01=
2

Q01=
1
2 [ ∑ q 1 p 0 + ∑ q1 p1
∑ q 0 p 0 ∑ q0 p1 ] ×100

Fisher’s Quantity Index number.

Q01=√ Q01 (Laspeyre ' s)×Q01 ( Paasche ' s)

Q 01 =
[√ ∑ q 1 p 0 × ∑ q 1 p 1 ×100
∑ q0 p 0 ∑ q 0 p 1 ]
3. Using the following data calculate the appropriate price index numbers for the years
2003 and 2004 with regard to the base 1990.
Price (in Rs./unit) Quantity(units)
Commodity
1990(p0) 2003(p1) 2004(p2) 1990(q0)
Rice 640 1550 1680 10
Wheat 1020 1540 1610 2
Sugar 60 126 130 2
Dal 50 120 110 1
4. From the following the data, compute the suitable price Index number.
Price (in Rs./unit) Quantity(units)
Commodity
Base Year Current Year Current Year (q1)
A 120 150 20
B 80 80 10
C 40 30 20
D 100 140 5

5. Calculate the Fisher’s Index number from the following data.

Base Year Current Year p0q1 p1q0
Total q0=V0/p0 Total q1=V1/p1
Item
Price(p0) Value Price(p1) Value
V0=p0q0 V1=p1q1
A 50 100 2 60 180 3 150 120
B 40 120 3 40 200 5 200 120
C 100 100 1 120 120 1 100 120
D 20 80 4 25 100 4 80 100
 ∑ p0 q0 = ∑ p1 q 1 = ∑ p 0 q 1 = ∑ p1 q 0 =
400 600 530 460
6. An enquiry into the budgets of middle class families in Bangalore provides the
following information:
Items Food Rent Clothing Fuel Others
Weights (%)
35 15 20 10 20
w
Prices(1991)
30 10 20 4 12
p0
Prices(1998)
34.8 12 25 5 18
p1
Based on the above data, calculate the appropriate Price Index number for the year
1998 by taking base year as 1991.
Test for an Index Number
There are many formulae for the computation of index numbers. Among them the best has to
be selected. An index number is good if it satisfies the following tests.
1. Time Reversal Test.
2. Factor Reversal Test
1. Time Reversal Test: This test is proposed by Prof. Irving Fisher. According to him, an
index number (formula) should be such that when the base year and current year are
interchanged (reversed), the resulting index number should be the reciprocal of the
earlier.
‘The Time Reversal Test requires that the index number computed backwards should
be the reciprocal of the index number computed forwards, except for the constant of
proportionality.’
Let P01 be the index number for the period ‘1’ with respect to the base period ‘0’. Let
P10 be the index number for the period ‘0’ with respect to the base period ‘1’. Then,
the particular index number satisfies time reversal test if –
P01 x P10 = 1
Here P01 and P10 are mere ratios – they should not be expressed in percentages.
Note: Time Reversal test is not satisfied by Laspeyre’s, Paasche’s and Dorbish-
Bowley index numbers. But it is satisfied by Marshall- Edgeworth and Fisher’s Index
numbers.

2. Factor Reversal Test: This test also is proposed by Prof. Irving Fisher. Here the
argument is that the index number should be such that the price index and quantity
index computed according to the formula should both be equally effective in
indicating the changes.
‘Factor Reversal test requires that the product of the index number of price (with
quantities as weights) and the index number of quantity (with prices as weights)
should indicate net change in value taking place in between the two periods.’
Thus, if P01 and Q01 are the price and quantity index numbers respectively, the test
requires that –
 ∑ p 1 q1
P01 x Q01 = ∑ p0 q0 .
Here P01 and Q01 are the mere ratios – they should not be expressed as percentages.

Note: Fisher’s index number satisfies Factor reversal test. But Laspeyre’s, Paasche’s,
Marshall-Edgeworth and Dorbish-Bowley index numbers do not satisfy the Factor
Reversal Test.

Fisher’s Index number is ‘Ideal’.

Fisher’s Index number is called “Ideal Index number” because of the following
reasons.
1. It is a Geometric Mean which is considered as the appropriate average for
averaging ratios.
2. It takes into account the base year quantities as well as the current year quantities.
3. It is free of bias.
4. It satisfies both Time reversal and Factor reversal tests.
Problems:
1. Using the following data verify whether –
i) Laspeyre’s Index number satisfies Time Reversal test.
ii) Fisher’s Index number satisfies Time Reversal test.
Price Quantity
Commodity
Base Year Current Year Base Year Current year
A 4 5 10 10
B 10 12 5 4
C 3 4 2 3
D 2 4 1 2

P01 (L )=
∑ p1 q 0 =122
∑ p0 q 0 98

P10 (L )=
∑ p0 q 1 =93
∑ p1 q 1 118

According to Time reversal Test, P01(L) x P10(L) =1.

122 93
×
98 118
Consider the L.H.S i.e P01(L) x P10(L) = ≠ 1. Hence it is proved that

Laspeyre’s Index number does not satisfy Time Reversal Test.

 2. Compute the Fisher’s Index number and show that it satisfies Time Reversal and
Factor Reversal test.
Base Year Current year
Item
Price(p0) Quantity(q0) Price(p1) Quantity(q1)
A 12 240 15 225
B 14 56 18 90
C 11 110 12 144
D 14 70 20 120

Soln:
p1q1 p0q0 p1q0 p0q1
3375 2880 3600 2700
1620 784 1008 1260
1728 1210 1320 1584
2400 980 1400 1680
∑ p1 q 1= 9123 ∑ p0 q0 = 5854 ∑ p1 q 0= 7328 ∑ p0 q1= 7224

P01 (F) = √ ∑ p1 q0 × ∑ p 1 q 1
∑ p0 q0 ∑ p0 q 1 √7328 9123
×
= 5854 7224

P10 (F) = √ ∑ p0 q1 × ∑ p0 q 0
∑ p1 q1 ∑ p1 q 0 √7224 5854
×
= 9123 7328
According Time reversal test, P01(F) x P10 (F) = 1

√
7328 9123 7224 5854
× × ×
Consider the L.H.S i.e P01(F) x P10 (F) = 5854 7224 9123 7328 = 1 = R.H.S. Hence
Proved.

∑ p 1 q1
Similarly for the Factor Reversal test, P01(F) x Q01 (F) = ∑ p0 q0 .

Now, Q01(F) = √ ∑ q1 p0 × ∑ q1 p 1
∑ q0 p0 ∑ q 0 p1 √
7224 9123
×
= 5854 7328

√ √ (9123) 9123 ∑ p 1 q1
2
7328 9123 7224 9123
× × × =
Thus, P01(F) x Q01 (F) = 5854 7224 5854 7328 (5854 )2 = 5854 = ∑ p 0 q 0 =R.H.S.

Hence Proved.
3. Using the following data, Show that Fishers Index number satisfies Time Reversal
and Factor Reversal Test.
2002 2004
Item
Price Quantity Price Quantity
P 5 6 6 7
Q 7 12 6 13
R 6 15 8 15
S 8 10 8 12
4. Compute an index number by using the following data.
No. of units used Price (in Rs./unit)
Commodity
in current year Base Year Current year
Rice 200 1.00 2.10
Sugar 20 2.00 5.20
Milk 200 2.20 2.40
Egg 30 4.00 6.00
Cloth 10 10.00 15.00

5. If Laspeyre’s Index number is 212.6 and Paasche’s Index number is 208.4, then
find the Dorbish-Bowley and Fisher’s Index number.
6. If Fisher’s Index number is 114.8 and Paasche’s Index number is 116.1 then find
the Laspeyre’s index number.
7. If Laspeyre’s index number is 461.3 and Dorbish-Bowley index number is 447.4
then find the Paasche’s index number.

Consumer Price Index number (Cost of living Index number)

Consumer Price Index number (CPI) is an index number of the cost met by a
specified class of consumers in buying a ‘Basket of goods and Services’. Here, the
Basket of Goods and Services means goods and services needed in day-to-day life
of the specified class of consumers. The patterns of consumption of goods are
different in different classes. And, so the general index numbers fail to indicate
the changes in costs with regard to various classes of consumers. Here, the Class
of consumers means a group of consumers having almost identical pattern of
consumption. Generally, the classes are those of workers of a factory, people
belonging to a particular class of community, government employees, Bank
employees etc.
Uses of Consumer Price Index number:
1. Consumer Price Index numbers indicate the changes in the consumer prices.
And, so they help governments in formulating policies regarding control of
price, taxation, imports and exports of commodities etc.
2. They are used in granting allowances and other facilities to employees.
3. They are used for the evaluation of purchasing power of money. They are used
for deflating money.
4. They are used for comparing changes in the cost of living of different classes
of people.
 Steps in the construction of Consumer Price Index number:
1. Defining Scope and coverage: At the very outset, it is necessary to decide the
class of consumers for which the index number is required. The class may be
that of bank employees, Government employees, merchants, farmers etc. In
any case, the geographical coverage should also be decided. That is, the
locality, city or town where the class dwells should be mentioned. Any have
the consumers in the class should have almost the same pattern of
consumption.
2. Conducting Family Budget enquiry and selecting the weights: After deciding
the scope and coverage, the next step is to conduct a sample survey of
consumer families regarding their budget on various items. The survey should
cover reasonably good number of representative families. It should be
conducted during the period of economic stability. In the survey, information
regarding commodities consumed by the families, their quality and the
respective budget are collected. The items included in the index number are
classified generally under the heads i) Food, ii) Clothing iii) Fuel and Lighting
and iv) Others. Sufficiently large numbers of representative items are included
under each head.
3. Obtaining Price quotations: The quotations of retail prices of different
commodities are collected from local market. The quotations are collected
from different agencies and from different places. Then, they are averaged and
these averages are made use in the construction of index numbers. The price
quotations of the current period and that of the base period should be
collected.
4. Computing the Index numbers
There are two methods of computation of Consumer Price Index number.
They are –
a) Aggregative Expenditure Method
b) Family Budget Method

a) Aggregative Expenditure Method: Here the quantities used in the base year are taken
as weights. Thus the CPI by this method is –
Total expenditure in the current year
P01= ×100
Total expenditure in the base year
P01=
∑ p1 q 0 ×100
∑ p0 q0
b) Family Budget Method: Consumer Price Index number by this method is the weighted
A.M of the Price relatives. The weights assigned are the expenditure in a normal
period. Thus, the CPI is –

P01=
∑ wP
∑w
Where w and P denote weights and Price Relatives respectively.
Problems:
1. Calculate the consumer price index numbers for the year 2005 with respect to the base
1980.
No. of units used in Price per unit in Rupees
Commodity
1980 1980 2005
Rice 4 250 1640
Sugar 0.5 600 1600
Dhal 1 400 2100
Tea 4 16 64
Fuel 12 80 300
Cloth 1 200 300
House Rent 12 200 1200
Others 12 200 2000

2. Compute the cost of living Index Number by using the following data.
Price In Rupees
Item Weight
Base Year Current Year
Food 10 150 225
House Rent 5 50 150
Clothing 2 30 60
Fuel& lighting 3 30 75
Miscellanous 5 50 75
3. Compute the consumer price index number using the following group indices and the
group weights.
Group Group Index Group Weight
Food 200 20
House Rent 250 10
Clothing 150 5
Fuel & Lighting 250 10
Others 200 5
4. Compute the cost of living index number by aggregative expenditure method.
Base Year Current year q0=V0/p0
Commodity Price(in Rs) Expenditure(in Price (in Rs.)
p0 Rs) V0=p0q0 p1
Rice 200 1000 900 5
Sugar 300 300 1500 1
Soap 15 45 30 3
Kerosene 140 140 420 1
House Rent 50 600 300 12
Others 50 600 400 12
5. A family budget enquiry revealed that the average expenditure on various items are
30%, 10%, 20%, 10% and 30% on food, cloth, house rent, fuel and others
respectively. If the respective group indices for 2003 with base 1990 are 160, 120,
200, 200 and 150, find the consumer price index number for 2003 with base 1990.
6. The following table gives the group indices with base 1980 under various heads for
two different years 2003 & 2004. The budget percentages as indicated in a survey are
also given. Compute consumer price index numbers for the two years with base 1980.
Group Index with base 1980 Percentage Budget
Group
2003(P1) 2004(P2) (w)
Food 412 418 30
House Rent 500 580 20
Clothing 290 240 10
Fuel 480 590 15
Others 360 410 25
Time Series
Generally, planning of economic and business activities are based on predictions of
production, demand, sales, etc. The future can be predicted by a detailed study of the
past variations. Thus, future demand can be predicted by studying the variations in the
demand for last few years.

A series of observations of a phenomenon recorded at successive points of time is

called Time series. It is chronological arrangement of statistical data regarding
the phenomenon.

Generally, time series are those of production, demand, sales, price, imports, exports,
bank rate, value of money, etc. The following is a time series of price of rice.

Year 1970 1974 1978 1982 1986 1990 1994 1998 2002
Price
180 280 260 300 380 540 810 1280 1460
(Rs./Quintal)

Usually, in a time series equidistant points of time are considered. There may be
weekly, monthly, yearly, etc., recordings.

A graphical presentation of a time series is called Historigram.

COMPONENTS OF A TIME SERIES

In a time series, the observations vary with time. The variation occurring in any
period is the result of many factors. The effects of these factors may be summed up as
four components. They are—
1. Trend (Secular trend, Long term movement)
2. Seasonal variation
3. Cyclical variation(Business cycle)
4. Irregular variation (Random fluctuation, Erratic variation)
An analytical study of different components of a time series, the effects of these
components, etc., is called Analysis of Time series.
 The utility of such analysis is –
a. Understanding the past behavior of the variable.
b. Knowing the existing nature of variation.
c. Predicting the future trend.
d. Comparison with other similar variables.

1. Trend (Secular Trend)

Trend is the overall change taking place in the time series over a long period of time. It
is the change taking place in a period of many years. Most of the time series show a
general tendency to increase, decrease or to remain constant over a long period of time.
Such overall change occurring is the trend.

Examples:
1. Steady increase in the population of India in the past many years is an upward trend.
2. Steady increase in the price of gold in the last many years is an upward trend.
3. Due to availability of greater medical facilities, death rate is decreasing. Thus, death
rate shows a downward trend.
4. Atmospheric temperature at a place, though shows short time variations, does not
show significant upward or downward trend.
The root cause of trend is technological advancement, growth of population, change in
the tastes, etc.
Trend is measured, mainly, by the method of moving averages and by the method of least
squares.
2. Seasonal Variation.
The regular and periodic variation in a time series is called seasonal variation. Generally, the
period of seasonal variation would be within one year. The factors causing seasonal variation
are
i. Weather conditions
ii. Customs, traditions and habits of people.
Seasonal variation is predictable.
Examples:
1. An increase in the sales of woolen cloths during winter.
2. An increase in the sales of note-books during the months of June, July and August.
3. An increase in atmospheric temperature during summer.

Seasonal indices are used for the measurement of seasonal variations.

3. Cyclical variation (Business cycle)

 Cyclical variation is an oscillatory variation which occurs in four stages viz,
prosperity, recession, depression and recovery. Generally, such variations occur in
economic and business activities. They occur in gap of more than one year.

One cycle consisting of four stages occurs in a period of few years. The period is not
definite. Generally, the period is 5 to 10 years.

Many Economists have explained the causes of cyclical variation. Each of them is
significant.

Examples:

1. The oscillatory movement of BSE share Index (Sensex) over last many years is
cyclical variation.
2. The upward and downward movement in the bank interest rates over last few
years is cyclical variation.

4. Irregular variation (Random fluctuations)

Sudden unexpected variations which take place in a time series are called Irregular
variations. They occur as a result of unexpected happenings such as wars, famines,
strikes, floods, etc. They are unpredictable. Generally, the effect of such variation
lasts for a short period.
Examples:
1. An increase in the price of vegetables due to a strike by the railway employees.
2. A decrease in the number of passengers in the city buses, occurring as a result of
strike by public sector employees.
3. An increase in the number of deaths due to earth-quakes.

MEASURMENT OF TREND
The methods used for the measurement of trend are -
1. Method of Moving Averages.
2. Method of Least squares.

1. Method of Moving Averages.

In this method, the short time variations are eliminated by finding the moving
averages. If the time series shows variation with period m (may be seasonal or
cyclical variation), the moving averages with period m are obtained. These moving
averages indicate the trend.

If y1, y2, y3, .….. yn are the observations and if m=3 is the period, the successive
moving averages are..

y 1+ y 2+ y 3 y 2+ y 3+ y 4 y 3+ y 4+ y 5
, , , etc..
3 3 3

Here, the first moving average is the average of the first, the second and the third
observations. It is written against the second time point which is the middle most of
the first, the second and the third time points. Such an association of moving averages
with time points is possible only if the period m is an odd number. If m is an even
number, firstly, moving averages are found. The second set of moving averages can
be associated with given time points (This procedure is called centering). However,
for finding trend values when m is even, firstly, moving sums with period m are
obtained, and the resulting sums are divided by 2m. These values are the trend values.

Merits.
1. The method is simple
2. If the time series shows periodic variation, this method is very effective in
obtaining trend.

Demerits.
1. Since the method does not establish mathematical relation, it cannot be used for
forecasting.
2. The method does not provide the trend values at the beginning and at the end of
the time series.
3. The method is not much effective when period of variation in the time series is not
definite.
Problems:
1. Compute the trend values by finding three-yearly moving averages for the
following time series.
Year 1999 2000 2001 2002 2003 2004 2005
Population(in
412 438 446 454 470 483 490
millions)
2. Compute the trend values by finding four yearly moving averages for the
following time series data. Also, graph the observed valued and the trend values.
Year 1996 97 98 99 2000 01 02 03 04
 Value 103 104 107 101 102 104 105 99 100
3. Calculate 5-yearly moving averages for the following data regarding profit in
Lakh Rupees.
Year 1 2 3 4 5 6 7 8
11 9
12 10
13
Profit 110 104 98 105 109 120 115 110 114 122 127
0
5- Yearly Moving Trend Values
Year Profit (in Rs)
sum (i) (i)/5
1 110 - -
2 104 - -
3 98 526 105.2
4 105 536 107.2
5 109 547 109.4
6 120 559 111.8
7 115 568 113.6
8 110 581 116.2
9 114 591 118.2
10 122 603 120.6
11 130 - -
12 127 - -

The above time series shows an upward trend.

4. Find the two-yearly moving averages to the following data. What is your
conclusion?
2-item moving sum
Production 2-yearly Trend Values
Year of previous column
(in tons) Moving sum (i)/2m=(i)/4
(i)
1996 42 - -
79
1997 37 144 36.0
65
1998 28 126 31.5
61
1999 33 128 32.0
67
2000 34 134 33.5
67
2001 33 130 32.5
63
2002 30 - -
5. The following data reveal that the number of televisions of a particular model sold
at different shops of a particular locality in Madras. Compute the 4-yearly moving
averages. Plot the Historigram and the trend values on a graph.

Year 1992 93 94 95 96 97 98 99 2000 2001 2002 2003

 T. V
580 540 570 680 690 700 612 692 697 620 589 501
sold
6. Obtain the trend values by finding three yearly moving averages for the following
data.

Year 1997 1998 1999 2000 2001 2002 2003 2004

Quantit
120 133 140 162 155 180 210 218
y

2. Method of Least squares

Method of least squares is a method of fitting a mathematical relation y=f(x) to a
bivariate data such that the sum of the squared deviations of the observed values from
their estimates is minimum. Here, the relation may be linear (Straight line), Quadratic
(Second degree), Exponential etc.

The process of minimization of the sum of the squared errors results in some
equations called Normal equations. The Normal equations are the equations which are
used for finding the coefficients of the relation which is fitted by the method of least
squares.

Merits.

1. The method is mathematical and so, it is highly efficient.

2. It can be used for predicting the future trend.
3. It can be used for deep statistical analysis.
Demerits.
1. The procedure of calculation is difficult.
2. The general form of the relation has to be predetermined by judgment.
3. If fresh observations are available, the whole procedure has to be repeated.
Linear (Straight line)Trend (By the Method of least Squares).

In this method, a relation of the type y=a+bx is fitted to the time series. Here, y denotes
the values and x denotes the points of time. The constants a and b are obtained by solving the
normal equations

na+b ∑ x =∑ y
a ∑ x+b ∑ x 2=∑ xy

Here, y denotes the observed values an n denotes the number of observations in the series. If
x is chosen such that ∑ x=0 , the values a and b are

∑y b=
∑ xy
a=
n and ∑ x2
By substituting the values of x in the trend equation, the corresponding trend values can be
obtained. The graph of trend equation can be obtained by plotting two trend values and
joining them by a straight line.

Problems:

1. The following are the figures of production (in thousand quintals) of a sugar factory.
Year 1992 1994 1996 1998 2000 2002 2004
Productio
77 81 88 94 94 96 98
n
(i) Fit a straight line trend to the data.
(ii) Estimate the production in the year 2006.
(iii) Graph the observed values and the trend values.
Ans: y = 89.7+3.61(x). Estimate in the year 2006 is y = 104.14thousand quintals.
2. Fit an equation of the type y= a + b(x) to the following data and estimate the
production in 2005.
Year 1997 1998 1999 2000 2001 2002 2003
Productio
142 180 150 127 140 171 140
n

Ans: y =150 - 1.214(x). Estimate in the year 2005 is y = 143.93

3. Fit a straight line trend to the following data. Estimate the values for the year 2008
and 2010.
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004
Value 380 400 650 720 690 620 670 950 1040
Ans: y = 680+70.5(x). Estimate in the year 2008 is y = 1244. Estimate in the year
2010 is y = 1385
4. For the following time series data, fit a straight line trend by the method of least
squares. Estimate the values for the year 2007.
Year 2001 2002 2003 2004 2005
Value 20 60 80 120 160
Ans: y = 88+34(x), Estimate in the year 2007 is y = 224.
5. Below are the figures of production of a sugar factory. Fit a straight line trend by the
method of least squares and estimate the production of 2005.
Year 1996 1997 1998 1999 2000 2001 2002
Productio 77 80 94 85 91 98 90
n (Lakh
 Rupees)
Ans: y = 87.85+2.571(x). Estimate in the year 2005 is y = 103.283 lakh rupees.
6. Fit a straight line trend for the following data.
Year 1990 1993 1996 1999 2002
Value 84 87 89 90 92
Estimate the values for the year 2005 and 2008.
Ans. y = 88.4 + 20.3(x), Estimate for the year 2005 is y =189.9
Estimate for the year 2008 is y = 250.8

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