ALAGAPPA UNIVERSITY

[Accredited with ’A+’ Grade by NAAC (CGPA:3.64) in the Third Cycle

and Graded as Category–I University by MHRD-UGC]
(A State University Established by the Government of Tamilnadu)
KARAIKUDI – 630 003

DIRECTORATE OF DISTANCE EDUCATION

B.Com
IV-SEMESTER

BUSINESS STATISTICS

Copy Right Reserved For Private use only

Author:
Dr. S. NAZEER KHAN
Assistant Professor of Commerce,
PG and Research Department of Commerce,
Dr. Zakir Husain College, Illayankudi

“The Copyright shall be vested with Alagappa University”

All rights reserved. No part of this publication which is material protected by this copyright notice
may be reproduced or transmitted or utilized or stored in any form or by any means now known or
hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording
or by any information storage or retrieval system, without prior written permission from the
Alagappa University, Karaikudi, Tamil Nadu.
 SYLLABI-BOOK MAPPING TABLE
BUSINESS STATISTICS
Syllabi Mapping in Book
UNIT I Statistics - Importance of Statistics in modern business Pages - 1-15
environment - Definition of Statistics - Scope and Applications of
Statistics Characteristics of Statistics- Functions of Statistics -
Limitations of Statistics - Statistical Software
UNIT II Measures of Central Tendency and Dispersion - Objectives Pages - 16-58
of statistical average - Requisites of a Good Average - Statistical
Averages - Arithmetic mean - Properties of arithmetic mean - Merits
and demerits of arithmetic mean \- Median - Merits and demerits of
median - Mode - Merits and demerits of mode - Geometric Mean-
Harmonic Mean - Appropriate Situations for the Use of Various
Averages - Positional Averages - Dispersion – Range - Quartile
deviations - Mean deviation, Standard Deviation - Properties of
standard deviation Coefficient of Variance..

UNIT III Theory of Probability - Definition of probability - Basic Pages - 59-75

terminology used in probability theory - Approaches to probability -
Rules of Probability - Addition rule - Multiplication rule -
Conditional Probability - Steps Involved in Solving Problems on
Probability - Bayes’ Probability - Random Variables
UNIT IV Theoretical Probability Distributions - Random variables - Pages – 76-95
Probability Distributions - Discrete probability distributions -
Continuous probability distributions - Bernoulli Distribution -
Repetition of a Bernoulli experiment - Binomial Distribution -
Assumptions for applying a binomial distribution - Examples of
binomial variate - Recurrence formula in case of binomial
distribution - Case study on binomial distribution Poisson
Distribution - Assumptions for applying the Poisson distribution -
Real life examples of Poisson variate - Recurrence relation -Case
study on Poisson distribution - Normal Distribution - Standard
Normal Distribution
UNIT V Estimation: Reasons for Making Estimates - Making Pages - 96-103
Statistical Inference - Types of Estimates - Point estimate - Interval
estimate - Criteria of a Good Estimator - Unbiasedness - Efficiency -
Consistency – Sufficiency - Point Estimates – Interval Estimates -
Case study on calculating estimates - Making the interval estimate
Interval Estimates and Confidence Intervals - Interval estimates of
the mean of large samples - Interval estimates of the proportion of
large samples - Interval estimates using the Student’s ‘t’ distribution
- Determining the Sample Size in Estimation..

UNIT VI Testing of Hypothesis in Case of Large and Small Samples - Pages - 104-120
Large Samples– Assumptions - Testing Hypothesis - Null and alternate
hypothesis - Interpreting the level of significance - Hypotheses are
accepted and not proved - Selecting a Significance Level - Preference of
type I error - Preference of type II error - Determine appropriate
distribution - Two – Tailed Tests and One – Tailed Tests - Two – tailed
tests - Case study on two – tailed and one-tailed tests - Classification of
Test Statistics - Statistics used for testing of hypothesis - Test procedure -
How to identify the right statistics for the test - Testing of Hypothesis in
Case of Small Samples - Small samples - ‘t’ Distribution - Uses of ‘t’ test
UNIT VII Chi-square Test - Chi-square as a Test of Independence -
Pages -121-124
Characteristics of Chi-square test - Degrees of freedom -
Restrictions in applying Chi-square test - Practical applications of
Chi-square test - Levels of significance - Steps in solving problems
related to Chi-Square test - Interpretation of Chi-Square values -
Chi-Square Distribution -Properties of Chi-square distribution -
Conditions for applying the Chi-Square test - Uses of Chi-square test
- Applications of Chi-Square test - Tests for independence of
attributes - Test of goodness of fit - Test for specified variance
UNIT VIII F – Distribution and Analysis of Variance (ANOVA) –
Pages – 125-131
Analysis of Variance (ANOVA) - Assumptions for F-test -
Objectives of ANOVA - ANOVA table - Assumptions for study of
ANOVA - Classification of ANOVA - ANOVA table in one- way
ANOVA - Two way classifications
UNIT IX Simple Correlation and Regression - Correlation - Pages - 132-141
Causation and Correlation- Types of Correlation - Measures of
Correlation - Scatter diagram - Karl Pearson’s correlation coefficient
- Properties of Karl Pearson’s correlation coefficient - Factors
influencing the size of correlation coefficient - Probable Error -
Conditions under which probable error can be used
UNIT X Spearman’s Rank Correlation Coefficient - Partial Correlations - Pages - 142-152
Multiple Correlations - Regression - Regression analysis - Regression lines
- Regression coefficient - Standard Error of Estimate - Multiple
Regression Analysis - Reliability of Estimates - Application of Multiple
Regressions.
UNIT XI Business Forecasting –Objectives of forecasting in Pages - 153-158
business - Prediction, projection and forecasting - Characteristics of
business forecasting-Steps in forecasting , Methods of Business
Forecasting - Business barometers.
UNIT XII Time series analysis – Extrapolation - Regression analysis Pages - 159-165
- Modern econometric methods - Exponential smoothing method -
Theories of Business Forecasting - Sequence or time-lag theory -
Action and reaction theory - Economic rhythm theory - Specific
historical analogy - Cross-cut analysis theory - Utility of Business
Forecasting - Advantages of business forecasting - Limitations of
business forecasting
UNIT XIII Time Series Analysis – Utility of the Time Series - Pages - 166-182
Components of Time Series - Long term trend or secular trend -
Seasonal variations - Cyclic variations - Random variations -
Methods of Measuring Trend - Free hand or graphic method - Semi-
average method - Method of moving averages - Method of least
squares - Mathematical Models for Time Series - Additive model -
multiplicative model, Editing of Time Series - Measurement of
Seasonal Variation - Seasonal average method - Seasonal variation
through moving averages - Chain or link relative method - Ratio to
trend method - Forecasting Methods Using Time Series - Mean
forecast - Naive forecast - Linear trend forecast - Non-linear trend
forecast - Forecasting with exponential smoothing
UNIT XIV Index Numbers: Definition – Relative - Classification of Pages - 183-203
index numbers - Base year and current year - Chief characteristics of
index numbers - Main steps in the construction of index numbers -
Methods of Computation of Index Numbers – Un- weighted index
numbers - Weighted index numbers, Tests for Adequacy of Index
Number Formulae - Cost of Living Index Numbers of Consumer
Price Index - Utility of consumer price index numbers -
Assumptions of cost of living index number - Steps in construction
of cost of living index numbers - Methods of Constructing
Consumer Price Index - Aggregate expenditure method - Family
budget method - Weight average of price relatives - Limitations of
Index Numbers - Utility and Importance of IndexNumbers.
 CONTENTS

UNIT I BLOCK I: FUNDAMENTALS OF STATISTICS 1-15

BASICS OF STATISTICS
1.0 Introduction
1.1 Objectives
1.2 Statistics
1.2.1 Definition of statistics
1.2.2 Importance of statistics
1.2.3 Limitations of statistics
1.2.4 Functions of statistics
1.2.5 Scope of statistics
1.3 Data
1.3.1 Types of data
1.4 Data collection techniques
1.4.1 Primary data
1.4.2 Secondary data
1.5 Presentation of data
1.5.1 Textual or descriptive presentation
1.5.2 Tabular presentation
1.5.3 Diagrammatic presentation
1.6 Summary
1.7 Key Words
1.8 Answers to Check Your Progress
1.9 Questions and Exercise
1.10 Further Readings
UNIT II MEASURES OF CENTRAL TENDENCY 16-58

2.0 Introduction
2.1 Objectives
2.2 Measures of Central Tendency
2.3 Mean
2.3.1 Arithmetic mean
2.3.2 Geometric mean
2.3.3 Harmonic mean
2.4 Median
2.5 Mode
 2.6 Partition values
2.6.1 Quartiles
2.6.2 Deciles
2.6.3 Percentile
2.7 Measures of Dispersion

2.7.1 Properties of a good measure of Dispersion

2.7.2 Characteristics of Measures of Dispersion

2.7.3 Classification of Measures of Dispersion

2.8 Range

2.9 Quartile deviation

2.10 Mean Deviation

2.11 Standard Deviation

2.11.1 Calculation of Standard Deviation

2.12 Coefficient of Variable

2.13 Summary

2.14 Key Words

2.15 Answers to Check Your Progress

2.16 Questions and Exercise

2.17Further Readings

UNIT III PROBABILITY 59-75

3.0 Introduction

3.1 Objectives

3.2 Importance Terms

3.3Types of Probability

3.4 Basic relationship of Probability

3.5 Addition Theorem of Probability

 3.6 Multiplication Theorem of Probability

3.7. Condition Probability

3.7.1 Combined Use Of Addition And Multiplication Theorem

3.8 Baye’s Theorem and its application

3.9 Summary

3.10 Key Words

3.11 Answer to Check your progress

3.12 Questions and Exercise

3.13 Further Readings

UNIT IV THEORETICAL PROBABILITY DISTRIBUTION 76-95

4.0 Introduction

4.1 Objectives

4.2 Random Variable

4.3Types of Random Variable

4.4 Binomial Distribution

4.5 Poisson Distribution

4.6 Normal Distribution

4.7 Summary

4.8 Key Words

4.9 Answer to Check your progress

4.10 Questions and Exercise

4.11 Further Reading

UNIT V BLOCK II: ESTIMATION, TESTING, CHI- 96-103

SQUARE TEST, F TEST
ESTIMATION
 5.1. Introduction

5.2 Reasons For Making Estimates

5.3 Types Of Estimates

5.4 Point Estimation

5.5 Interval Estimation

5.6 Criteria of a Good Estimator

5.7 Unbiasedness

5.8 Consistency

5.9 Efficiency

5.10 Sufficiency

5.11 Confidence Intervals

512 Determining The Sample Size In Estimation

UNIT VI TEST OF HYPOTHESIS 104-120

6.0 Introduction

6.1 Objectives

6.2 Hypothesis Testing on Population Mean

6.2.1 Population is Known

6.2.2 Population is Unknown

6.3 Difference Between Mean of Two Populations

6.3.1 Population Variance Known

6.3.2 Population Variance Unknown

6.4 Test of Hypothesis for Population Proportion

6.5 Difference Between Two Proportion

6.6 Summary
 6.7 Key Words

6.8 Answers to Check Your Progress

6.9 Questions and Exercise

6.10 Further Readings

UNIT VII CHI – SQUARE TEST 121-124

7.0 Introduction

7.1 Objectives

7.2 Characteristics of Chi –Square Test

7.3 Uses of Chi –Square Test

7.4 Steps of Chi –Square Test

7.5 Summary

7.6 Questions & Exercise

7.7 Further Reading

UNIT VIII F – TEST 125-131

8.0 Introduction
8.1 Analysis of Variance (ANOVA)

8.2 Assumptions in Analysis of Variance

8.3 Basic steps in Analysis of Variance

8.3.1 One Way ANOVA

8.3.2 Two Way ANOVA

8.4 Summary

8.5 Key Words

8.6 Answer to check your progress

8.7 Questions and Exercise

8.8 Further Reading

 BLOCK III: CORRELATION, REGRESSION,
BUSINESS FORECASTING
UNIT IX CORRELATION ANALYSES 132-141

9.0 Introduction

9.1 Objectives

9.2 Correlation

9.3 Linear Correlation

9.4 Types of Correlation

9.5 Scatter Diagram

9.6 Two – Way table

9.7 Pearson’s Correlation Coefficient

9.8 Summary

9.9 Key Words

9.10 Answer to Check Your Progress

9.11 Questions and Exercise

9.13 Further Readings

UNIT X SPEARMAN’S RANK CORRELATION 142-152

10.1 Introduction

10.2 Objectives

10.3Spearman’s rank Correlation Coefficient

10.4 Properties of Correlation Coefficient

10.4 Regression

10.5 Linear Regression

 10.6 Types of Regression

10.6.1 Regression Equation of Y on X

10.6.2 Regression Equation of X on Y

10.7 Curve fitting by the Method of Least square

10.8 Derivations of Regression Equation

10.9 Properties of Correlation Coefficient

10.10Summary

10.11 Key Words

10.12 Answer to Check Your Progress

10.13Questions and Exercise

10.14 Further Readings

UNIT XI BUSINESS FORECASTING 153-158

11.1 Introduction

11.2 The Objectives of Forecasting

11.3 Prediction, projection and forecasting

11.4 Characteristics of forecasting are as follows

11.5 Steps in Forecasting

11.6 Methods of Business Forecasting

BLOCK IV: TIME SERIES ANALYSIS, INDEX

NUMBERS
UNIT XII TIME SERIES 159-165

12.1 Introduction

12.2 Regression analysis

12.3 Exponential Smoothing Method

12.4 Theories of Business Forecasting:

 12.5 Theory of Economic Rhythm

12.6 Action and Reaction Approach

12.7 Sequence Method or Time Lag Method

12.8 Specific Historical Analogy

12.9 Cross-Cut Analysis

12.10 Model Building Approach

12.11 Utility of Business Forecasting

12.12 Limitations of Business Forecasting

12.13 Business Forecasting: Advantage

UNIT XIII ANALYSIS OF TIME SERIES 166-182

13.1 Time series

13.1.1 Components of time series

13.1.2 Analysis of time series

13.2 Measurement of trends

13.2.1Moving average method

13.2.2 Least square method

13.3 Measurement of seasonal variation

13.3.1 Methods of constructing seasonal indices

13.4 Forecasting

13.5 Deseasonalisation

13.6 Summary

13.7 Key Words

13.8Answers to Check Your Progress

13.9 Questions and Exercise

13.10 Further Readings

UNIT XIV INDEX NUMBER 183– 203

14.0 Introduction

14.1 Objectives

14.2 Index Numbers

14.2.1 Types of Index Numbers

14.2.2 Problems in construction of Index Numbers

14.2.3 Methods of Constructing Index Numbers

14.2.4 Quantity or Volume Index Numbers

14.2.5 Test for Index Numbers

14.2.6 Chain Base Index Numbers

14.3 Cost of living Index Numbers

14.3.1 Construction of cost of living Index Numbers

14.3.2 Methods to construct cost of living Index Numbers

14.3.3 Uses of cost of living Index Numbers

14.4 Uses of Index Numbers

14.5 Limitations of Index Numbers

14.6 Summary

14.7 Key Words

14.8 Answers to Check Your Progress

14.9 Questions and Exercise

14.10 Further Readings

 Statistics
BLOCK I: FUNDAMENTALS OF
STATISTICS NOTES
UNIT I - STATISTICS
Structure
1.0 Introduction
1.1 Objectives
1.2 Statistics
1.2.1 Definition of statistics
1.2.2 Importance of statistics
1.2.3 Limitations of statistics
1.2.4 Functions of statistics
1.2.5 Scope of statistics
1.3 Data
1.3.1 Types of data
1.4 Data collection techniques
1.4.1 Primary data
1.4.2 Secondary data
1.5 Presentation of data
1.5.1 Textual or descriptive presentation
1.5.2 Tabular presentation
1.5.3 Diagrammatic presentation
1.6 Summary
1.7 Key Words
1.8 Answers to Check Your Progress
1.9 Questions and Exercise
1.10 Further Readings
1.0 INTRODUCTION
Statistics is an area of study that deals with collecting, organising,
analyzing, interpreting and presenting data. The study of statistics has a
lot of applications in industries, agriculture, medicine etc. In this unit,
you will learn about the various importance and scope of statistics. You
will also come to know about types of data, ways of collecting them and
also how to present data.
1.1 OBJECTIVES
After going through this unit, you will
• Understand the meaning , importance and functions of statistics
• Learn the different types of data and how to collect them.
• Know how the data collected can be presented
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 Statistics 1.2 STATISTICS
The word statistics of English language have been derived from the
NOTES Latin word status or Italian word „statista‟ or German word „statistik‟. In
each case it means "an organised political state”. Although, in the past,
statistics was considered as the "science of statecraft" as it was used by
the government of various States to collect data regarding population
,births , deaths, taxes etc.,. Statistics, nowadays, have experienced a
modern development. Statistics play a crucial role in enriching a specific
domain by collecting data in that field, analyse the data by applying
various statistical techniques and making inferences about the same.For
example, knowing the average height of the students will enable the
engineer to know about the size of the door.
1.2.1 DEFINITION OF STATISTICS
The definition of statistics can be expressed in two ways to cover
two different concepts. They are
1. Statistics as numerical data
2. Statistics for statistical method
1. Statistics as numerical data
When the word „statistics‟ is used in plural sense, it refers to the
collection of numerical data.
For example: - Export or Import quantity, Foreign Direct Investment,
etc..,.
According to Webster,” statistics are classified facts representing
the conditions of the people in a state especially those facts which can be
stated in number or in table of numbers or in any tabular or classified
arrangements"
This definition of Webster reveals that only numerical facts can be
termed statistics. This is an old, narrow and inadequate definition for
modern times.
According to Bawley “Statistics are numerical statement of facts in
any department of inquiry placed relation to each other"
Here, Bowley says that statistics is the science of counting and
ignores other aspects such as analysis, interpretations etc..,.
According to Yule and Kendall,” By statistics we mean
quantitative data affected to a market extent by multiplicity of cause"
Yule and Kendall‟s definition tells us that numerical data is
affected by multiplicity of cause. For example, the cost of production is
affected by wage cost, exchange rate, raw material etc..,.
According to Professor Horace Secrist," It is the aggregate of
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facts affected to mark extent by multiplicity of causes, numerically
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expressed, enumerated or estimated according to a reasonable standard of Statistics
accuracy, connecting in a systematic manner for the predetermined
purpose and placed in relation to each other" NOTES
Secrist‟s definition for statistics is more complete. The vital point that
the definition covers are
1) Aggregate of facts
2) Affected by multiplicity of cause
3) Numerically expressed
4) Estimated according to standard of accuracy
5) Systematic Collection of data
6) Data collected for a predetermined purpose
7) Comparable
2. Statistics as Statistical Methods
According to Bowley,” Statistics the science of measurement of
social organism, regarded as a whole in all its manifestation"
This definition of Bowley is insufficient
According to Wallis and Roberts," Statistics is a body of methods
for making wise decision on the face of uncertainty"
This definition is modern as it conveys statistical methods enable
us to arrive at valid decisions.
According to Croxton and Cowden” statistics must be defined as
the science of collection, presentation, analysis and interpretation of
numerical data”
This definition gives a more elaborate meaning to statistics as
statistical tools.
1.2.2 IMPORTANCE OF STATISTICS
Statistics can be used to various areas of business operations for
effective results. Some prominent areas are given below.
1) Startups - While opening a new business or acquire one, we
need to study the market from a statistical point of view to get
accuracy in the market demand and supply .A businessman must
do proper research by collecting data, analyzing and interpreting
them regarding market trends before starting his business.
2) Production - The production of the commodity depends upon
various factors such as demand, supply of capital etc..,. These
factors must be analyzed statistically to get a precise and accurate
view of the same.
3) Marketing - An ideal marketing strategy requires statistical
analysis on population, income of consumers, availability of the
product ect..,.
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 Statistics 4) Investment - Statistics play a vital role in making decisions
regarding buying shares, debentures or real estate. Using this
NOTES statistical data, an investor will buy investments at a lesser price
and sell when the price increases.
5) Banking - Banking sector is highly influenced by economic and
market conditions. Bank have separate research department which
collect and analyse information regarding inflation rate, interest
rates, bank rates etc..,.
1.2.3 LIMITATIONS OF STATISTICS
1) Statistics does not analyse qualitative phenomenon
As statistics is a science which deals with numerical, it cannot be
applied in data that cannot be measured in terms of quantitative
measurements. However statistical techniques can be used to convert the
qualitative data to quantitative data.
2) Statistics does study individuals
Statistics deals with aggregate quantities and doesn't give
importance to individual data. This is because individual data is not
useful for statistical analysis.
3) Statistical laws are not exact
Statistical interpretations are based on averages and hence are only
approximations can be made
4) Statistics may be misused
Statistical data when used by an inexperienced person or illiterate
person can lead to wrong interpretations. Hence it must be used only by
experts.
1.2.4 FUNCTIONS OF STATISTICS
1) Consolidation
Statistics enables you to consolidate and understand huge data by
providing only significant observations.
For example, instead of observing the marks of each and every individual
with class average will enable you to know the class's performance as a
whole.
2) Comparison
Classification and tabulation of data are used to compare the data.
Various statistical tools such as graph, measure of depression dispersion,
correlation gives us huge scope for comparison.
For example, the market demand for a product can be compared among
the states. This enables the company to identify and analyse the target
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 Statistics
3) Forecasting
NOTES
Curriculum
Forecasting means predicting the future prospects. Statistics plays a
huge role in forecasting the future. NOTES
For example, with the data of the sales value for the past 10 years, we
will be able to predict the sales of the coming year approximately. Time
series analysis and regression analysis are important for forecasting.
4) Estimation
One of the main aims of statistics is to draw conclusions on a huge
population based on the analysis from a sample group.
For example, from a sample height of 10 students will be able to estimate
the average height of all the students from the class.
5) Test of hypothesis
Statistical hypothesis is portraying a huge population from the
inferences of a sample observation.
For example, if a particular fertilizer helps in increasing the crop yield in
a particular area then it will be used in other areas based on this sample.
1.2.5 SCOPE OF STATISTICS
1) Statistics in Industries
Statistics is extensively used in huge number of industries.
Statistics may be used in sales forecasting, consumer preference, quality
control, inventory control, risk management etc. Sampling is vital for
inspection plans.
2) Statistics in Education
Statistics plays an important role in education. Statistics help in
measuring and evaluating the progress of the student, formulating
policies and also helps to predict the future performance of the students
to help them improve in the same.
3) Statistics in Economics
Statistics helps us to understand and analyse economic theories.
Right from analysing microeconomic factors like the demand for the
product, research regarding different markets to macroeconomic concept
like inflation, unemployment can be done easily using statistics.
4) Statistics in Medicine
Statistics helps in researching and analysing medical experiments
and investigations. Biostatic enables researchers to identify if a particular
treatment or drug is working and how effective it is.
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5) Statistics in Modern Application
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 Statistics A lot of software‟s are developed day to day for experimentation,
forecasting and estimation.
NOTES
Curriculum For example, SYSAT is one such software which provides with scientific
and technical graphical options.
NOTES 6) Statistics in Agriculture
Statistics can be applied in agriculture by analysing the
effectiveness of fertilizers. It can be used in taking decisions regarding
inputs and outputs, inventories etc..,.

1.3 DATA

Data are pieces of factual information that are recorded and applied
for analysis. Data is a tool which helps us to understand certain problems
by providing us with information. They are a set of values with
qualitative and quantitative variable.
1.3.1 TYPES OF DATA
Data of broadly classified into two based upon who collected the
data
Primary data
Primary data is the data collected by investigator himself for the
first time for his own research and analysis. It is also known as first-hand
information. Primary data is collected using method such as personal
interview, survey etc..,.
Secondary data
Secondary data is the data which is already been collected and
process by the person for the purpose of his research. Journals, internal
sources, journals, book etc..,. are sources of secondary data.

CHECK YOUR PROGRESS -1

1. What are the two ways in which statistics can be defined?

2. What is the definition of statistics according to Professor

Horace Secrist?

3. How does statistics help in comparing data?

4. What is the role of statistics in medicine?

5. What is secondary data?

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 Statistics

1.4 DATA COLLECTING TECHNIQUES NOTES

1.4.1PRIMARY DATA
1) Direct Personal Investigation
Direct personal investigation is the method in which the
investigator directly goes to the source to collect information.
Merits
(i) Information collected in this method is more authentic and
accurate
(ii) There is high degree of accuracy in qualitative information
(iii) The original opinion or data shall be obtained.
Demerits
(i) This is a time consuming process
(ii) If the investigator is not intelligent enough to understand the
mental state of the source it may lead to wrong interpretation.
(iii) It may result in personal bias.
2) Indirect Oral Investigation
Indirect oral investigation is when the investigator investigates a
person close to the source. This is done due to the reluctance of the
original person.
Merits
(i) It saves time and labour
(ii) It is easy and convenient
(iii) It covers a wide range of area.
Demerits
(i) Information received may not be reliable
(ii) Person chosen for this purpose me not be suitable
(iii) It may be expensive as information is collected from various
sources.
3) Information collected from local agencies
In this method investigator appoints a few agencies in various
regions to cover various fields of inquiry. This method is generally used
by newspaper companies to get information from various places in
various topics such as sports, economics etc..,.
Merits
(i) Avoid area can be easily covered
(ii) This is a time saving method of collecting data Self-Instructional Material
(iii) The cost of collecting data is less
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 Statistics
Demerits
NOTES
(i) Sometimes the information collected may contradict one another
(ii) The information can be less accurate
(iii) This method will be expensive and a full-time agent is hired in
different places
4) Questionnaire method
Questionnaire method is the most famous method of collecting
primary data .A questionnaire is a set of questions device for conducting
survey. The questionnaire is sent to the respondent with the request to fill
it and send it back within a specific time.
Merits
(i) This method is cheaper
(ii) The time consumed for this process is very less
(iii) This is an unbiased method of collecting data
Demerits
(i) Sometimes the respondent may provide wrong information
(ii) There is no type of personal motivation in this method
(iii) There are chances of ignorance or late reply from the
respondents
General principles of framing a questionnaire
1) The questionnaire must not be very long
We must try to give the questions as minimum as possible. Long
questionnaire may lead to boredom or discontentment among the
respondents.
2) The question must move from general to specific
When the question moves from general to specific respondent
become more comfortable in answering the questions
3) The question should be ambiguous
The questions must be in such ways that the respondents are able to
give clear and quick answers to the questions
4) The person should not contain double negatives
Words like don't you or wouldn't you must not be used in the
questions as they might tempt the respondent to give a biased answer.
5) The question should not be lending questions
The questions should not give clues to the respondent on how they
must answer it.
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6) The question must not provide alternators for the answer
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 For example, instead of asking would you like to do engineering or Statistics
medicine after class 12, the correct way of asking the question is would
you like to do engineering? NOTES
1.4.2 SECONDARY DATA
1) Published sources
Certain government and non-government organisations publish
various journals, research papers, surveys etc which are very helpful and
reliable. Some of them are mentioned below
(i) Publications of international bodies like UNO, WTO and WHO
etc..,.
(ii) Publications of research institutes like ISI, NCERT, ICAR etc..,.
(iii) Government publications
(iv) Publications of commercial and financial institutions
(v) Publications of governmental organisations
(vi) Newspaper, journals and periodicals.
2) Unpublished sources
Unpublished sources cover all the sources where data is maintained
privately by certain private agencies or companies. The data collected by
universities, research institutions also come under unpublished sources.

1.5 PRESENTATION OF DATA

In the previous topic we saw how data can be collected .As the data
collected is generally huge we need to comprise and deliver it in a
presentable form. Generally there are three ways of presenting
presentation of data. They are
1) Textual or Descriptive Presentation
2) Tabular Presentation
3) Diagrammatic Presentation
1.5.1 Textual or Descriptive Presentation
When the data collected is presented in the form of a text it is
called textual or descriptive presentation. Generally this method cannot
be used to present large data.
For example, in the 2011 census, the population of India was
1,21,08,54,977 comprising of 58, 64, 69,174 females and 62, 37, 24,248
males. The literacy rate is 74.0 4 percentage and density of population is
382 person per square kilometer.
From the above example, we can see that the data is represented
textually. One of the major limitations of this method is that the readers
must go through the entire text and get the required information.
Self-Instructional Material
1.5.2 Tabular Presentation of Data
9
 Statistics When the data is presented in the form of rows and columns it is
called tabular presentation of data.
NOTES Example:

AREA FEMALE MALE TOTAL

URBAN 90% 89% 89.5%

RURAL 87% 88% 87.5%

TOTAL 88.5% 88.5% 88.5%

The about table represents the pass percentage of the examination

conducted in Tamilnadu it has three rows (urban, rural, total) and three
columns (female, male, total). It is a 3×3 table where each small box is
called the cell which gives information regarding the pass percentage.
This method is very significant as it enables us to use it for further
statistical treatment. This tabular representation is further classified into
four
(i) Qualitative Classification
Qualitative classification is when the collected information is
classified in the form of attributes such as gender, nationality etc..,. The
table given above is an example of qualitative classification where the
information is classified in the form of gender and location.
(ii) Quantitative Classification
When information can be measured quantitatively like age, income,
marks etc..,.then, such classifications are called quantitative classification
Example

MARKS FREQUENCY

0-10 5

10-20 10

20-30 20

30-40 15

40-50 10

(iii) Temporal Classification

Temporal classification is when classification is based on the basis
Self-Instructional Material of time like year, months, days etc..,.

10
 Statistics

NOTES
Example

DAYS OF A WEEK PRODUCTION (no of pairs of shoes)

MONDAY 2000

TUESDAY 1750

WEDNESDAY 3000

THURSDAY 2250

FRIDAY 1550

(iv) Spatial Classification

Spatial classification is when the data classification is based on
place like town, city, district, state, country etc..,.
Example

STATE LITERACY RATE

TAMIL NADU 80.09%

ANDHRA PRADESH 67.02%

KARNATAKA 75.36%

KERALA 93.91%

1.5.3 Diagrammatic Presentation

In this method the data is represented diagrammatically and is very
easy to understand generally data is represented diagrammatically in
three ways.
1) Geometric Diagram
This category consists of bar diagrams and pie charts
(i) Bar diagram
Bar diagram is a diagrammatic representation of data in equal
spaced and equalwidth rectangular bars for each class of data .The
height or length of the bar tells us about the magnitude of the class.
Bar diagrams can be easily used for comparison of data. Both
qualitative and quantitative data can be represented in bar diagram. Self-Instructional Material

11
 Statistics They can be further divided into two broad categories.
a) Multiple bar diagram
NOTES
When there is a need to compare two set of data multiple
bar diagram is used. For example import and export, production
and sale etc..,.
b) Component bar diagram
Component bar diagram also known as Sub diagrams are
used to compare different components of a particular class. For
example, the various components such as rent, medicine,
education on which the monthly salary spend can be easily
understood from a component bar diagram.
(ii) Pie diagram
A pie diagram is similar to that of a component bar diagram but
it is represented in circle proportionally instead of bars. The values
given in each class is converted into percentage and then each figure is
multiplied by 3.6 degree. (360/100 - 360 degree of a circle divided
into 100 parts) the values are then divided accordingly in the circle.
2) Frequency diagram
When the data is in the form of grouped frequency are usually
represented by frequency diagrams. Histogram, frequency polygon,
frequency curve and ogive are types of frequency diagram.
(i) Histogram
Histogram is a diagram which consists of rectangular bars
whose area is proportional to the frequency of a variable and
whose width is equal to the class interval.
(ii) Frequency polygon
A frequency polygon is another type of frequency
distribution graph. In a frequency polygon, the number of
observations is marked with a single point at the midpoint of each
and every interval. Then the points are connected using a straight
line.
(iii)Frequency curve
The frequency curve is obtained by drawing a smooth
freehand curve that passes through the points of a frequency
polygon closely as possible.
(iv) Ogive
Ogive also known as the cumulative frequencies are of two
types. When the cumulative frequencies are plotted against their
Self-Instructional Material upper limits respectively, then it is less than ogive. When the

12
 cumulative frequencies are plotted against their lower limits Statistics
respectively, then it is more than ogive.
3) Arithmetic line graph NOTES
An arithmetic line graph also known as time series graph is a graph
where the time ( months, years, weeks) are plotted in the x axis and their
respective values are plotted in the y axis. It helps us in analysing trends
and periodicity of data.

CHECK YOUR PROGESS - 2

6. What is indirect oral investigation?

7. State two merits of questionnaire method

8. Give some examples of published sources

9. What is component bar graph?

10. What is spatial classification?

1.6 SUMMARY

 The word „statistics‟ is used in plural sense refers to the collection

of numerical data and in singular sense it means the science of
collecting, classifying and using statistics
 Statistics can be used to various areas of business operations such
as start-ups, production, and marketing for effective results.
 Data is a tool which helps us to understand certain problems by
providing us with information. It can be further divided into
primary and secondary data.
 Direct personal investigation, indirect oral investigation,
questionnaire methods are some of the methods of collecting
primary data. Publications of international bodies, research
institutions are methods of collecting secondary data.
 Data can be presented in three ways. They are Textual or
descriptive presentation, Tabular presentation, Diagrammatic
presentation.

1.7 KEY WORDS

Statistics, data, Primary data, Secondary data, Direct personal
interview, Indirect oral investigation, Questionnaire, Qualitative,
Quantitative, Temporal, Spatial, Bar diagram, Pie diagram, Histogram,
Frequency Polygon, Frequency curve, Ogive , Arithmetic line graph.
Self-Instructional Material

13
 Statistics 1.8 ANSWERS TO CHECK YOUR PROGRESS
NOTES 1. The word „statistics‟ is used in plural sense refers to the collection
of numerical data and when in singular sense it means the science
of collecting, classifying and using statistics
2. According to Professor Horace Secrist," It is the aggregate of
facts affected to mark extent by multiplicity of causes,
numerically expressed, enumerated or estimated according to a
reasonable standard of accuracy, connecting in a systematic
manner for the predetermined purpose and placed in relation to
each other
3. Classification and tabulation of data are used to compare the data.
Various statistical tools such as graph, measure of depression
dispersion, correlation gives us huge scope for comparison.
4. Statistics helps in researching and analysing medical experiments
and investigations. Biostatic enables researchers to identify if a
particular treatment or drug is working and how effective it is.
5. Secondary data is the data which is already been collected and
process by the person for the purpose of his research.
6. Indirect oral investigation is when the investigator investigates a
person close to the source. This is done due to the reluctance of
the original person.
7. Questionnaire method
(i) This method is cheaper
(ii) The time consumed for this process is very less.
8. Publications of international bodies like UNO, WTO and WHO,
Publications of research institutes like ISI, NCERT, ICAR, and
Government publications.
9. Component bar diagram also known as Sub diagrams are used to
compare different components of a particular class.
10. Spatial classification is when the data classification is based on
place like town, city, district, state, country etc..,.
1.9 QUESTIONS AND EXERCISE
SHORT ANSWER QUESTIONS
1. Write short notes about the types of date
2. List the merits and demerits of direct personal interview
3. What are the general principles followed while framing a
questionnaire?
4. Write about the classification of tabular presentation of data.
5. What is a bar diagram? What are its types?
LONG ANSWER QUESTIONS
1. Analyse the importance and scope of statistics
Self-Instructional Material 2. Explain in detail about the data collection techniques used in
14
 primary data. Statistics
3. Discuss about the functions and limitations of statistics.
4. Explain the various methods used for presentation of data. NOTES
1.10 FURTHER READINGS
1. Gupta, S. P. : Statistical Methods, Sultan Chand and Sons, New
Delhi.
2. Hooda, R. P.: Statistics for Business and Economics, Macmillan,
New Delhi.
3. Hein, L. W. Quantitative Approach to Managerial Decisions,
Prentice Hall,NJ.
4. Levin, Richard I. and David S. Rubin: Statistics for Management,
Prentice Hall, New Delhi.
5. Lawrance B. Moore: Statistics for Business & Economics, Harper
Collins, NY.
6. Watsman Terry J. and Keith Parramor: Quantitative Methods in
Finance International, Thompson Business Press, London.

Self-Instructional Material

15
Measures of Central Tendency
UNIT II MEASURES OF
NOTES
CENTRALTENDENCY
Structure
2.0 Introduction
2.1 Objectives
2.2Measures of Central Tendency
2.3 Mean
2.3.1 Arithmetic mean
2.3.2 Geometric mean
2.3.3 Harmonic mean
2.4 Median
2.5 Mode
2.6 Partition values
2.6.1 Quartiles
2.6.2 Deciles
2.6.3 Percentile
2.7 Measures of Dispersion
2.7.1 Properties of a good measure of Dispersion
2.7.2 Characteristics of Measures of Dispersion
2.7.3 Classification of Measures of Dispersion
2.8 Range
2.9 Quartile deviation
2.10 Mean Deviation
2.11 Standard Deviation
2.11.1 Calculation of Standard Deviation
2.12 Coefficient of Variable
2.13 Summary
2.14 Key Words
2.15Answers to Check Your Progress
2.16 Question and Exercise
2.17 Further Readings
2.0 INTRODUCTION
Measures of central tendency are a statistical tool used to
summarize data that depicts the central value of the given data. These
measures enable us to identify where most of the values fall. The
three most commonly used measures of central tendency are mean,
median and mode. In this unit you will learn about them extensively
Self-Instructional Material
and also learn about some other partition values.
16
2.1 OBJECTIVES Measures of Central Tendency

From this unit you will NOTES

 Learn about the measures of central tendency

 Come to know about the various methods of calculating
mean, median and mode.
 Know about the partition values.
2.2 MEASURES OF CENTRAL TENDENCY
When working on a given set of data, it is not possible to
remember all the values in that set. But we require inference of the data
given to us. This problem is solved by mean, median and
mode. Measures of Central Tendency, represent all the values of the
data. As a result, they help us to draw an inference and an estimate of all
the values. They are also known as statistical averages. Their simple
function is to mathematically represent all the values in a particular set
of data. Hence, this representation shows the general trend and
inclination of all the values.

An average provides a simple way of representation of all the

individual data. It also aids in the comparison of different groups of
data. In addition to this, an average in economic terms can represent the
direction an economy is headed towards. Hence, it can be easily used to
formulate policies and bring about a reform for a better economy.
2.3 MEAN
2.3.1 ARITHMETIC MEAN
The arithmetic mean of a series of numbers is sum of all
observations divided by the total number of observations in the series.
Example:
There are two brothers, with different heights. The height of the
younger brother is 138 cm and height of the elder brother is 154cm. The
average height of the two brother is total height divided into two equal
parts,
Self-Instructional Material
(138+154) ÷ 2 = 292 ÷ 2 = 146 cm

17
Measures of Central Tendency So 146 cm is the average height of the brothers. Here 154 > 146
> 138. The average value lies in between the minimum value and the
NOTES
maximum value.
Thus if x1, x2, ..., xn represent the values of n observations,
then arithmetic mean (A.M.) for n observations is: (direct method)

There are two methods for computing the arithmetic mean: (i)
Direct method (ii) Short cut method.
Direct Method:
Example:
The following data represent the number of books issued in a college
library is selected from 7 different days 17,1 9, 22, 25, 15, 40, 21 find
the mean number of books.
Solution:

x̅ = 20 + 39 + 22 + 25 + 45 + 40 + 54 = 245 = 35
7 7
Hence the mean of the number of books is 35
Indirect Method:
In this method an assumed mean or an arbitrary value (A) is used as
the basis of calculation of deviations (di) from individual values. If di
= xi – A

Example:
A student’s marks in 5 subjects are 95, 78, 88, 72,99. Find the
average of his marks.
Let us take the assumed mean, A = 88
xi di= xi– 88
95 7
78 10
88 0
Self-Instructional Material
18
 72 -16 Measures of Central Tendency

99 10 NOTES

Total 11
Solution:

11
= 88 + = 88 + 5.5 = 93.5
5

The arithmetic mean of average marks is 93.5

Discrete Grouped data

If x1, x2, ...,xn are discrete values with the corresponding
frequencies f1, f2, …, fn.
Then the mean for discrete grouped data is defined as (direct
method)

In the short cut method the formula is modified as

Example:
Given the following frequency distribution, calculate the arithmetic
mean

Marks 64 63 62 61 60 59
No. Of. Students 8 18 12 9 7 6

Self-Instructional Material

19
Measures of Central Tendency
Solution:
NOTES
xi fi fi xi di = xi – A fidi
(A=62)

64 8 512 2 16

63 18 1134 1 18

62 12 744 0 0

61 9 549 -1 -9

60 7 420 -2 -14

59 6 354 -3 -18

60 3713 -7

Direct Method
𝑛
𝑖=1 𝑓𝑖 𝑥𝑖
𝑥=
𝑁
x̅ = 3713 / 60 = 61.88
Short cut method
𝑛
𝑖=1 𝑓𝑖 𝑑𝑖
𝑥 = 𝐴+ 𝑥𝑐
𝑁
Here A = 62
x̅ = 62 – 7 = 61.88
60
The mean mark is 61.88
Mean of continuous Grouped data:
Direct method
𝑛
𝑖=1 𝑓 𝑖 𝑥 𝑖
𝑥= , xi is the midpoint of the class interval
𝑁

Short cut method

𝑛
𝑖=1 𝑓𝑖 𝑑𝑖
𝑥 = 𝐴+ 𝑥𝑐
𝑁
Self-Instructional Material
20
 𝑥𝑖 − 𝐴 Measures of Central Tendency
𝑑=
𝑐 NOTES
Where A – any arbitrary value
c - Width of the class interval
xi -is the midpoint of the class interval
Example:
For the frequency distribution of yield of tomato given in table
calculate the mean yield per plot.
Yield per plot ( in
64 - 84 84 - 104 104 – 124 124 – 144
Kg)
No of plots 3 5 7 20

Solution:
Yield ( in Kg) No of plots ( fi ) Mid xi fi xi d = (xi - A) / c fidi
64 - 84 3 74 222 -1 -3
84 - 104 5 94 470 0 0
104 – 124 7 114 798 1 7
124 – 144 20 134 2680 2 40
Total 35 4170 44

Direct Method
𝑛
𝑖=1 𝑓𝑖 𝑥𝑖
𝑥=
𝑁
x̅ = 4170 / 35 = 119.143
Short cut method
𝑛
𝑖=1 𝑓𝑖 𝑑𝑖
𝑥 = 𝐴+ 𝑥𝑐
𝑁
x̅ = 94 + 44 x c = 119.143
35
3.3.2 WEIGHTED ARITHMETIC MEAN
For calculating simple mean, all the values or the sizes of items in
the distribution have equal importance. But in practical life this may not be
so, in case some items are more important than others, a simple average
computed is not representative of the distribution. Proper weightage has to
be given to the various items.
For example a student may use a weighted in order to calculate their Self-Instructional Material
percentage grade in a course, in this the student would multiply the
weighing of all assessment items in the course( eg: assignment, exams,
21
Measures of Central Tendency projects, etc.)by respective grade that was obtained in each of categories
NOTES The average whose component items are being multiplied by
certain values known as “weights” and the aggregate of the multiplied
results are divided by the total sum of their “weight”
Let x1,x2,....,xn be the set of n values having weights w1,w2,....,wn
respectively,
then the weighted mean is
𝑛
𝑤1 𝑥1 + 𝑤2 𝑥2 + … … … 𝑤𝑛 𝑥𝑛 𝑖=1 𝑤𝑖 𝑥𝑖
𝑥𝑤 = = 𝑛
𝑤1 + 𝑤2 + 𝑤3+⋯………+𝑤1 𝑖=1 𝑤𝑖

Example:
A student obtained the marks 40,50,60,80, and 45 in math,
statistics, physics, chemistry and biology respectively. Assuming
weights 5,2,4,3, and 1 respectively for the above mentioned subjects,
find the weighted arithmetic mean per subject.

Cu
Solution
Components Marks scored ( xi ) Weightage (wi ) wi xi N
Maths 40 5 200
Statistics 50 2 100
Physics 60 4 240
Chemistry 80 3 240
Biology 45 1 45
Total 15 825

Weighted average:

= 825 / 15 = 55 marks / subject

Combined Mean:
In the arithmetic averages and the number of items in two or
more related groups are known, the combined or the composite mean
of the entire group can be obtained by

Self-Instructional Material The advantage of combined arithmetic mean is that we can

22
 determine the overall mean of the combined data without going back Measures of Central Tendency
to the original data NOTES
Example:
If a sample size of 22 items has a mean of 15 and another sample size
of 18 items has a mean of 20. Find the mean of the combined sample?
Solution:

= 22 x 15 + 18 x 20
22 + 18
= 330 + 360 = 690 = 172.5
40 40

ulum
Merits of AM
ES 1. It can be calculated easily and is also easy to understand.
2. Fluctuation can be minimized
3. It can further be used for statistical treatement like
median,mode etc.,.
4. This method is rigidly defined and hence can be used for
comparison
Demerits of AM
1. It cannot be plotted in a graph.
2. It is not applicable in qualitative data.
3. AM cannot be calculated if the class intervals have open
ends.
4. It is highly influenced by extreme observations.
3.3.2 GEOMETRIC MEAN ( GM )
A geometric mean is a mean or average which shows the
central tendency of a set of numbers by using the product of their
values.
The geometric mean of two numbers, say x, and y is the
square root of their product x×y. For three numbers, it will be the
cube root of their products i.e., (x y z) 1⁄3.
The geometric mean of a series containing n observations is
the nth root of the product of the values. If x1, x2,……xn are
observations then Self-Instructional Material

23
Measures of Central Tendency

NOTES

Example:
Calculate the geometric mean of the following growth of price of
onions per 100 Kg per annum is 180, 250, 490, 1400, and 1050

x 180 250 490 1400 1050 Total

log x 2.2553 2.3979 2.6902 3.1461 3.0212 13.5107

Solution:

= Antilog 13.5107
5
= Antilog 2.7021 = 503.6
Geometrical mean of onion rate is 503.6
Example:
Find the geometric mean for the following distribution of student’s
marks:
Marks 0 – 30 30 – 50 50 – 80 80 - 100
No . of students 20 30 40 10

Solution:
No of Mid
Marks f log x
students f points x
Self-Instructional Material
24
 20 (log 15) = 20(1.1761) = Measures of Central Tendency
0 – 30 20 15
23.5218 NOTES
30 (log 40) = 30 (1.6020)
30 – 50 30 40
= 48.0168
40 (log 65) = 20(1.8129) =
50 – 80 40 65
72.5165
80 - 10 (log 90) = 20(1.9542) =
10 90
100 19.5424
Total 100 163.6425

= Antilog 163.6425
100
= Antilog 1.6364 = 503.6
Geometrical mean of onion rate is 43.29
Merits of Geometric mean:
1. It is strictly defined
2. It is based on all items
3. It is very suitable for averaging ratio, rates and percentages
4. It is capable of further mathematical treatment
5. Unlike AM, it is not affected much by the presence of
extreme values
Demerits of geometric mean:
1. It cannot be used when the values are negative or if any of the
observations is zero
2. It is difficult to calculate particularly when the items are very
large or when there is a frequency distribution
3. It brings out the property of the ratio of the change and not the
absolute difference of change as the case in arithmetic mean
4. The GM may not be the actual value of the series
3.3.3 HARMONIC MEAN
Harmonic mean of a set of observations is defined as the
reciprocal of the arithmetic average of the reciprocal of the given
values. If x1,x2…..xn are n observations.
A harmonic mean is used in averaging of ratios. The most Self-Instructional Material
common examples of ratios are that of speed and time, cost and unit
of material, work and time etc. The harmonic mean (H.M.) of n
25
Measures of Central Tendency observations is
NOTES H.M. for ungrouped data

Example:
Calculate the harmonic mean of the numbers 13.5, 14.5, 14.8, 15.2
and 16.1
Solution:
The harmonic mean is calculated as below:
x 1/x
13.2 0.0758
14.2 0.0704
14.8 0.0676
15.2 0.0658
16.1 0.0621
Total 0.3417

= 5 = 14.63
0.3417
H.M. Discrete Grouped data:
For a frequency distribution

Example:
The frequency distribution of first year students of a particular
college, calculate the harmonic mean
Age (years) 17 18 19 20 21
2 5 13 7 3
Solution:

Self-Instructional Material
26
 Age ( years) x Number of students f f / x Measures of Central Tendency

17 2 0.1176 NOTES

18 5 0.2778
19 13 0.6842
20 7 0.3500
21 3 0.1429
Total 30 1.5725

= 30 / 1.5725 = 19.0779 ≈ 19 years

Merits of H.M:
1. It is strictly defined
2. It is defined on all observations.
3. It is amenable to further algebraic actions
4. It is most suitable average when it is desired to give greater
weight to smaller observations and less weight to larger
observations.
Demerits of H.M:
1. It is not easily understood.
2. It is difficult to calculate.
3. It is only an abstract figure and may not be the action of the
series.

CHECK YOUR PROGRESS – 1

1. What the 3 measures of central tendency?
2. What is the formula for arithmetic mean under
direct method?
3. Mention 2 merits of geometric mean
4. What do you mean by harmonic mean?

2.4 MEDIAN
The number of students in your classroom, the money your parents
earns, the temperature in your city is all important numbers. But how
can you get the information of the number of students in your school
or the amount earned by the citizen of your entire city? Self-Instructional Material
The median is that value of the variable which divides the
27
Measures of Central Tendency group into two equal parts, one part comprising all values greater and
the other all values less than median.
NOTES
Ungrouped data
Arrange the given values in the ascending or descending order.
If the number of value is odd, median is the middle value.
For example if we have the number of values 12, 15, 21, 27, 35. So
the numbers are odd then taking the mean as the midpoint 21.
(𝑛+1)𝑡ℎ
Median = term if n is odd
2

If the number of values is even, median is the mean of the middle two
values.
For example if we have 12, 15, 21, 27, 35, 40. So the numbers are
even then taking the mean of the numbers,
(𝑛 )𝑡ℎ (𝑛+1)𝑡ℎ
Median = Mean( 𝑎𝑛𝑑 terms )
2 2

So in the above example, take the mean of 21 and 27 and

divide it by 2 which will give you 24.

Example:
The salaries of 8 employees who work for a small company
are listed below. What is the median salary?
40,000; 29,000; 35,500; 31,000; 43,000; 30,000; 27,000; 32,000
Solution:
Arrange the data in ascending order
27,000; 29,000; 30,000; 31,000; 32,000; 35,500; 40,000; 43,000
Since there is an even number of items in the data set, we compute
the median by taking the mean of the two middlemost numbers.
(𝑛)𝑡ℎ (𝑛+1)𝑡ℎ 4 𝑡ℎ + 5𝑡ℎ 𝑖𝑡𝑒𝑚
Mean ( 𝑎𝑛𝑑 terms ) =
2 2 2
31,000 + 32,000 63,000
= = = 31,500
2 2

The median salary is 31,500

Example: 13
Find the median of the following set of points in a game: 15, 14, 10,
8, 12, 8, 16
Self-Instructional Material
28
Solution: Measures of Central Tendency

First arrange the values in an ascending order 8, 8, 10, 12, 14, 15, 16 NOTES

The number of point values is 7, an odd number. Hence, the median

is the value in the middle position.
Median = ( n+1)th term
2
= (7+1)th term = 4th
2
The median is 12
Grouped data:
In grouped distribution, values are associated with
frequencies. Grouping can be in the form of a discrete frequency
distribution or continuous frequency distribution. Whatever may be
the distribution, cumulative frequencies have to be calculated the
total number of items.
Cumulative frequency: (cf)
Cumulative frequency of each class is the sum of the
frequency of the class and the frequencies of the pervious classes, ie
adding the frequencies successively, so that the last cumulative
frequency gives the total number of items.
When the data follows a discrete set of values grouped by size, we use the
(𝑛+1)𝑡ℎ
formula item for finding the median. First we form a cumulative
2
frequency distribution, and the median is that value which corresponds to
(𝑛+1)𝑡ℎ
the cumulative frequency in which item lies.
2
Example: 14
The following frequency distribution is classified according to the
number of students on different branches. Calculate the median number of
leaves per branch.
No of Students 1 2 3 4 5 6 7
Number of Branches 2 11 15 20 25 18 10

Solution:
No of Students No of Branches Cumulative Frequency
x f cf
1 2 2 Self-Instructional Material
2 11 13
29
Measures of Central Tendency 3 15 28
NOTES 4 20 48
5 25 73
6 18 91
7 10 101
Total 101

(𝑁+1)𝑡ℎ
Median = size of item
2
(101 +1)𝑡ℎ
= size of item
2

= 51th item
Median = 5 because 51th item corresponds to 5
Median for continuous grouped data
In case, the data is given in the form of a frequency table with
class interval etc, then the following formula is used for calculating
median in continuous grouped data

Where l = Lower limit of the median class

m = cumulative frequency preceding the median
c = width of the median class
f = frequency in the median class
N = total frequency
Example:
Calculate median from the following data

Class
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39
interval
Frequency 5 8 10 12 7 6 3 2

Solution:
Class Frequency True class Cumulative
interval interval frequency
f
cf
Self-Instructional Material
30
 0-4 5 0.5 - 4.5 5 Measures of Central Tendency

5-9 8 4.5 - 9.5 13 NOTES

10-14 10 9.5 - 14.5 23

15-19 12 14.5 - 19.5 35
20-24 7 19.5 - 24.5 42
25-29 6 24.5 - 29.5 48
30-34 3 29.5 - 34.5 51
35-39 2 34.5 - 39.5 53
53

𝑁 53
= = 26.5
2 2

Here the cumulative frequency is greater than or equal to 26.5 is 14.5

l = 14.5
N/2 = 26.5
m = 23
f = 12
= 14.5 + (26.5 – 23) x 5 = 14.5 + 1.46 = 15.96
12
Merits of Median:
1. Median is not influenced by extreme values because it is a
positional average.
2. Median can be calculated in case of distribution with open
end intervals.
3. Median can be located even if the data are incomplete.
4. Median can be located even for qualitative factors such as
ability, honesty etc.
Demerits of Median:
1. A slight change in the series may bring drastic change in
median value
2. In case of even number of items or continuous series, median
is an estimated value other than any value in the series. Self-Instructional Material
3. It is not suitable for further mathematical treatment except its
31
Measures of Central Tendency use in mean deviation.
4. It is not taken into account all the observation.
NOTES
2.5 MODE
The mode is the most frequently occurring values or scores.The
mode is useful when there are a lot of repeated values. There can be
no mode, one mode, or multiple modes.
Its importance is very great in marketing studies where a manager is
interested in knowing about the size, which has the highest
concentration of items. For example, in placing an order foot shoes
or ready-made garments the model size helps because the sizes and
other sizes around in common demand.
Ungrouped Data:
For ungrouped values or a series of individual observation mode
is often found by mere inspection
Example:
Find the mode for the following list of values:
13,18,13,14,13,16,14,21,13
Solution:
The mode is the number that is repeated more often than any other
Therefore the Mode = 13
In some cases the mode may be absent while in some cases there
may be more than one mode.

Example:
Ms.Rossy asked students in her class how many siblings they each has.
Find the mode of the data : 0,0,0,1,1,1,1,2,2,2,2,3,3,4
Solution:
The modes are 1 and 2 siblings
Grouped Data
For Discrete distribution, the highest frequency and corresponding value
of X is mode.
Continuous distribution:

Where L is the lower class limit of the modal class

Self-Instructional Material f1is the frequency of the modal class
32
 f0 is the frequency of the class preceding the modal class Measures of Central Tendency
in the frequency table NOTES
f2is the frequency of the class succeeding the modal class
in the frequency table
h is the class interval of the modal class
Example:18
Calculate mode for the following:
C 400 and
0-50 50-100 100-150 150-200 200-250 250-300 300-350 350-400
-I above

f 5 14 40 91 450 87 60 38 15

Solution:
The highest frequency is 450 and corresponding class interval in 200 –
250, which is the modal class
Here L = 200, f1 = 150, f0=91, f2=87, h=50

= 200 + 150 – 91 x 50
2 x 150 – 91 – 87
= 2450 = 200 + 24.18 = 224.18
122
Example: 19
Find the modal class and the actual mode of the data set below
Number 1-3 4-6 7-9 10-12 13-15 16-18 19-21 22-24 25-27 28-30

Frequency 7 6 4 2 2 8 1 2 3 2

Solution:
Modal class = 10 – 12

Here L = 10, f1 = 9, f0 = 4, f2 = 2, h = 3
= 10 + 9-4 x3
2x9-2-4
= 10 + 5 x 3 = 10 + 1.25 = 11.25 Self-Instructional Material
12
33
Measures of Central Tendency Mode = 11.25
NOTES Merits of mode:
1. It is easy to calculate and in some cases it can be located mere
inspection.
2. Mode is not at all affected by extreme values
3. It can be calculated for open-end classes
4. It is usually an actual value of an important part of the series
5. In some circumstances it is the best representative of data
Demerits of mode:
1. It is not based on all observation
2. It is not capable of further mathematical treatment
3. Mode is ill defined generally it is not possible to find mode in
some cases.
4. As compared with mean, mode is affected to a great extent by
sampling fluctuations
It is unsuitable in cases where relative importance of items has to be
considered.
2.6 PARTITION MEASURES
2.6.1 QUARTILES
The quartiles divide the distribution in four parts. There are three
quartiles denoted by Q1, Q2 and Q3 divides the frequency distribution in
to four equal parts
That is 25% of data will lie below Q1, 50% of data below Q2 and
75percent below Q3. Here Q2 is called the Median. Quartiles are
obtained in almost the same way as median.

Ungrouped Data:
If the data set consist of n items and arranged in ascending order then

Example:20
Compute quartiles for the data 25, 18, 30, 8, 15, 5, 10, 35, 40, 45.
Solution:
(𝑛 +1)𝑡ℎ (10+1)𝑡ℎ
Q1 = item = item = (2.75)th item
4 4
(3)𝑟𝑑
= 2nd item + ( 3rd item - 2nd item)
4
Self-Instructional Material
34
 (3)
=8+ ( 10 – 8 ) = 8 + 1.5 Measures of Central Tendency
4
NOTES
Q1= 9.5
(𝑛+1)𝑡ℎ (10+1)𝑡ℎ
Q3 = 3 item = item = 3 x (2.75)th item
4 4

= (8.25)th item
(1)
= 2nd item + ( 9th item - 8th item)
4
(1)
= 35 + (40 – 35 ) = 35 + 1.25
4

Q3 = 36.25
Continuous series:
In the case of continuous series, find the cumulative frequency and
then use the interpolation formula.
 Find Cumulative frequencies
 Find N / 4
 Q1 class is the class interval corresponding to the value of the
cumulative frequency just greater than N / 4
 Q3 class is the class interval corresponding to the value of the
cumulative frequency just greater than 3 N / 4

Where N=Σf = total of all frequency values

l1 = lower limit of the first quartile class
f1 = frequency of the first quartile class
c1 = width of the first quartile class
m1 = cumulative frequency preceding the first quartile
class
l3 = lower limit of the 3rd quartile class
f3 = frequency of the 3rd quartile class
m3 = cumulative frequency preceding the 3rd quartile
class
c3 = width of the third quartile class
Example:
The marks secured by group of students in their internals.
Class 10 - 20 20 - 30 30 - 40 40 - 50 50 - 60
Self-Instructional Material
Frequency 4 3 2 1 5

35
Measures of Central Tendency

NOTES Solution:
Class Frequency f Cumulative frequency cf
10 - 20 4 4
20 - 30 3 7
30 - 40 2 9
40 - 50 1 10
50 - 60 5 15

N / 4 = 15 / 4 = 3.75 which lies in 10 – 12

Lies in the group 10 – 20

(3.75− 0)
= 10 + x 10 = 10 + 9.38 = 19.38
4

3N / 4 = 3x15 / 4 = 11.25 which lies in 50 -60

Therefore Q3 lies in the group 50 – 60

= 50 + (11.25 – 10 ) x 10
5
= 50 + 2.5 = 52.5
2.6.2 DECILES
These are the values which divide the total number of observation
into 10 equal parts. They are D1, D2, D3, D4, D5, D6, D7, D8, D9 and D10.
Ungrouped Data:
Example:
Compute the D7 for the data: 5, 24, 36, 12, 20, and 8.
Solution:
Arranging the given data in the ascending order 5,8,12,20,24,36
(5(𝑛 +1))𝑡ℎ (5(6+1))𝑡ℎ
D5 = observation = observation = ( 3.5)th observation
10 10

= 3rd item + ½ (4th item - 3rd item)

= 12 + ½ ( 20-12) = 12 + 4 = 16
Self-Instructional Material
36
Grouped Data: Measures of Central Tendency

Example: NOTES

Calculate the D1 and D7 for the given data

Class interval 0 -10 10-20 20-30 30-40 40-50 50-60 60-70
Frequency 5 7 12 16 10 8 4
Solution:
Class interval Frequency f Cumulative frequency cf
0 -10 5 5
10-20 7 12
20-30 12 24
30-40 16 40
40-50 10 50
50-60 8 58
60-70 4 62
D4 = (4N / 10)th item = (4 x 62 / 10)th item = (24.8)th item
This lies in the interval 30 – 40
(4N / 10 – m)
D4 = l + xc
𝑓
(24.8−24) (0.8)
= 30 + x 10 = 30 + ( 0.8) x 10
16 16

= 30 + 0.5 = 30.5
D7 = (7N / 10)th item
= (7 x 62 / 10)th item
= (43.4)th item
This lies in the interval 40 – 50
(7N / 10 – m)
D4 = l + xc
𝑓
(43.4−40) (3.4)
= 40 + x 10 = 30 + x 10
10 10

= 40 + 3.4 = 43.4
2.6.3 PERCENTILE
The percentile values divide the distribution into 100 parts each
containing 1 percent of the cases. The percentile (P k) is that value of the
variable upto which lie exactly k% of the total number of observation Self-Instructional Material
Relationship
37
Measures of Central Tendency P25 = Q1
NOTES P50 = Median = Q2
P75 = 3rd quartile = Q3
Ungrouped Data:
Example: 24
The monthly income ( in ₹1000) of 8 persons working in a factory. Find
P30 income value 17, 21,14,36,10,25,15,29

Solution:
Arrange the data in the increasing order : 10, 14, 15, 17, 21, 25, 29, 36
n=8

P30 = ( 30 (n + 1) )th item

100
= ( 30 (8 + 1) )th item
100
= ( 30 x 9 )th item = 2.7th item
100
= 2 item + 0.7( 3rd items - 2nd items)
nd

= 14 + 0.7 ( 15 -14)
= 14 + 0.7
P30 = 14.7
Grouped Data:

Example: 25
Find P53 for the following frequency distribution.
Class 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40
interval
Frequency 5 8 12 16 20 10 4 3

Solution:
Class interval Frequency Cumulative frequency
0-5 5 5
Self-Instructional Material
38
 5-10 8 13 Measures of Central Tendency

10-15 12 25 NOTES

15-20 16 41
20-25 20 61
25-30 10 71
30-35 4 75
35 - 40 3 78
Total 78

P53 = l + (53N / 10 – m) x c
f
= 20 + (41.34 - 41) x 5= 20 + 0.335 = 20.335
20

2.7 MEASURES OF DISPERSION

Dispersion is the extent till which a distribution can be stretched
or squeezed. We can understand variation with the help of the following
example:
Series I Series II Series III

10 2 10

10 8 12

10 20 8

∑X = 30 30 30

In all three series, the value of arithmetic mean is 10. On the basis
of this average, we can say that the series are alike. If we carefully
examine the composition of three series, we find the following
differences:
(i) In case of 1st series, three items are equal; but in 2nd and 3rd
series, the items are unequal and do not follow any specific
order.
(ii) The magnitude of deviation, item-wise, is different for the 1st,
2nd and 3rd series. But all these deviations cannot be
ascertained if the value of simple mean is taken into Self-Instructional Material
consideration.

39
Measures of Central Tendency (iii) In these three series, it is quite possible that the value of
arithmetic mean is 10; but the value of median may differ from
NOTES
each other. This can be understood as follows;

Series I Series II Series III

10 2 8

10 median 8 median 10 median

10 20 12

∑X = 30 30 30

The value of Median’ in 1st series is 10, in 2nd series = 8

and in 3rd series = 10. Therefore, the value of the Mean and
Median are not identical.
(iv) As the average remains the same, the nature and extent of the
distribution of the size of the items may vary. In other words,
the structure of the frequency distributions may differ even
though their means are identical.
2.7.1 PROPERTIES OF A GOOD MEASURE OF DISPERSION
There are certain pre-requisites for a good measure of dispersion:
1. It should be simple to understand.
2. It should be easy to compute.
3. It should be rigidly defined.
4. It should be based on each individual item of the distribution.
5. It should be capable of further algebraic treatment.
2.7.2 CHARACTERISTICS OF MEASURES OF DISPERSION
 A measure of dispersion should be rigidly defined
 It must be easy to calculate and understand
 Not affected much by the fluctuations of observations
 Based on all observations
2.7.3 CLASSIFICATION OF MEASURES OF DISPERSION
The measure of dispersion is categorized as:
(i) An absolute measure of dispersion:
It involves the units of measurements of the observations. For
example, (i) the dispersion of salary of employees is expressed in rupees,
and (ii) the variation of time required for workers is expressed in hours.
Such measures are not suitable for comparing the variability of the two
data sets which are expressed in different units of measurements
Self-Instructional Material
40
(ii) A relative measure of dispersion: Measures of Central Tendency

It is a pure number independent of the units of measurements. NOTES

This measure is useful especially when the data sets are measured in
different units of measurement
For example, a nutritionist would like to compare the obesity of school
children in India and Africa. He collects data from some of the schools in
these two countries. The weight is normally measured in kilograms in
India and in pounds in Africa. It will be meaningless, if we compare the
obesity of students using absolute measures. So it is sensible to compare
them in relative measures.
2.8 RANGE
Raw Data:A range is the most common and easily understandable
measure of dispersion. It is the difference between the largest and
smallest observations in the data set
Range ( R ) = L - S
Grouped Data:The grouped frequency distribution of values in the data
set, the range is the difference between the upper class limit of the last
class interval and the lower class limit of the first class interval.

Coefficient of Range: The relative measure of range is called the

coefficient of range
Coefficient of range = (L-S) / (L + S)
Example:
Find the value of range and its coefficient for the following data 49, 81,
36, 64, 121, 100.
Solution:
L = 121 : S = 36
Range : L – S = 121 – 36 = 85
Co-efficient of Range = (L-S) / (L+S) = 121-36 /121+36
= 85 / 157 = 0.5414

Example:
Calculate range and its coefficient from the following distribution.

x 10- 15 15 – 20 20 – 25 25 - 30

Frequency 4 10 16 8 Self-Instructional Material

41
Measures of Central Tendency

NOTES
Solution: L = 30, S = 10
Range = L - S = 30 – 10 = 20
Coefficient of Range = (L-S) / (L+S) = 30 - 10 / 30 + 10
= 20/ 40= 0.5
Merits of Range
 It is the simplest of the measure of dispersion
 Easy to calculate
 Easy to understand
 Independent of change of origin
Demerits of Range
 It is based on two extreme observations. Hence, get affected by
fluctuations
 A range is not a reliable measure of dispersion
 Dependent on change of scale

2.9 QUARTILE DEVIATION

The quartiles divide a data set into quarters. The first quartile,
(Q1) is the middle number between the smallest number and the median
of the data. The second quartile, (Q2) is the median of the data set. The
third quartile, (Q3) is the middle number between the median and the
largest number. Quartile deviation is half of the difference between the
first and third quartiles. Hence it is called as Semi Inter Quartile Range
Quartile deviation or semi-inter-quartile deviation is
Q = ½ × (Q3 – Q1)
Coefficient of Quartile Deviation
Coefficient of Q.D = Q3 – Q1 / Q3 + Q1
Merits of Quartile Deviation
 All the drawbacks of Range are overcome by quartile deviation
 It uses half of the data
 Independent of change of origin
 The best measure of dispersion for open-end classification
Demerits of Quartile Deviation
 It ignores fifty percent of the data
 Dependent on change of scale
 Not a reliable measure of dispersion
Example:
Self-Instructional Material
42
 Calculate the quartile deviation and its coefficient for the wheat Measures of Central Tendency
production (in Kg) of 25 acres is given as : 1120, 1240, 1320, 1040, NOTES
1080, 1200, 1440, 1360, 1680, 1730, 1785, 1342, 1960, 1880, 1755,
1720, 1600, 1470, 1750 and1885.
Solution: Arrange the observation in increasing order:
1040, 1080, 1120, 1200, 1240, 1320, 1342, 1360, 1440, 1470,
1600, 1680, 1720, 1730, 1750, 1755, 1785, 1880, 1885, 1960.
Q1 = value of (n+1) / 4 th item
= value of (20 +1) / 4 th item = value of (5.25)th item
= 5th item + 0.25 ( 6th item – 5th item)
= 1240 + 0.25 (1320 – 1240)
= 1240 + 20 = 1260
Q1 = 1260
Q3 = value of 3(n+1) / 4 th item
= value of 3(20 +1) / 4 th item = value of (15.75)th item
= 15th item + 0.75 ( 16th item –15th item)
= 1750 + 0.75 (1755 – 1750)
= 1750 + 3.75 = 1753.75
Q3 = 1753.75
Q.D = ( Q3 – Q1 ) / 2 = (1753.75 – 1260) / 2 = 492.75 / 2
= 246.875
Coefficient of QD = (Q3 – Q1) / ( Q3 + Q1 )
= (1753.75 – 1260) / (1753.75 + 1260)
= 0.164

2.10 MEAN DEVIATION

The average deviation, it is defined as the sum of the deviations
from an average divided by the number of items in a distribution The
average can be mean, median or mode. Theoretically median is d best
average of choice because sum of deviations from median is minimum,
provided signs are ignored. However, practically speaking, arithmetic
mean is the most commonly used average for calculating mean deviation
and is denoted by the symbol MD.
Mean Deviation is of three types of series:
Self-Instructional Material
 Individual Data Series
 Discrete Data Series
43
Measures of Central Tendency  Continuous Data Series
NOTES Individual Data Series: For individual series, the Mean Deviation can
be calculated using the following formula.
𝟏 |𝑫|
𝑴𝑫 = 𝑿−𝑨 =
𝑵 𝑵
Where
MD = Mean deviation.
X = Variable values
A = Average of choices
N = Number of observations
Coefficient of Mean Deviation:
Mean deviation calculated by any measure of central tendency is
an absolute measure. The purpose of comparing variation among
different series, a relative mean deviation is require. The relative mean
deviation are obtained by dividing the mean deviation by the average
used for calculating mean deviation
The Coefficient of Mean Deviation can be calculated using
𝐌𝐃
𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐌𝐃 =
𝐀
Example:
Calculate mean deviation and coefficient of mean deviation for the
following individual data:

Items 28 72 90 140 210

Solution:
28 + 72 + 90 + 140 + 210 540
𝐴= = = 108
5 5

Item X Deviation |D|

28 80

72 36

90 18

Self-Instructional Material
44
 Measures of Central Tendency
140 32
NOTES
210 102

Ʃ|D|= 268

1 |𝐷| 268
Mean Deviation = MD = X−A =
= = 𝟓𝟑. 𝟔
N 𝑁 5
MD 53.6
Coefficient of Mean Deviation = = = 𝟎. 𝟒𝟗𝟔𝟑
A 108
Discrete Data Series
For discrete series, the Mean Deviation can be calculated using
𝐟 |𝐱 − 𝐌𝐞| 𝐟 |𝐃|
𝑴𝑫 = =
𝑵 𝑵
Where, N = Number of observations.
f = Different values of frequency f.
x = Different values of items.
Me = Median.
Coefficient of Mean Deviation
The Coefficient of Mean Deviation can be calculated using the
following formula.
𝐌𝐃
𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐌𝐃 =
𝐌𝐞
Example: Calculate the mean deviation and for the following discrete
data

Items 42 108 135 150 210

Frequency 6 15 3 3 9

Solution:

Xi Frequency fi fixi |xi – Me| fi |xi – Me|

42 6 252 93 558

108 15 1620 27 405

Self-Instructional Material
135 3 405 0 0

45
Measures of Central Tendency
150 3 550 15 45
NOTES
210 9 1890 75 675

Ʃ fi |xi – Me| = 1683

N = 36

N + 1 th item 5 + 1 th item 6th item

Median = = = = 3rd item
2 2 2
= 135
f |x − Me| f |D| 1683
Mean Deviation = = = = = 𝟒𝟔. 𝟕𝟓
N N 36

MD 46.75
Coefficient of MD = = = 𝟎. 𝟑𝟒𝟔𝟑
Me 135
Continuous Data Series
The method of calculating mean deviation in a continuous series
is same as the discrete series. In continuous series, find a midpoint of the
various classes and take deviation of these points from the average
selected
f |x − Me| f |D|
𝑀𝐷 = =
𝑁 𝑁
Where N = Number of observations.
f = Different values of frequency f.
x = Different values of items.
Me = Median.

Coefficient of Mean Deviation

The Coefficient of Mean Deviation can be calculated using the
following formula.
MD
Coefficient of MD =
Me
Example:
Find out the mean deviation from the given data

Self-Instructional Material
46
 Measures of Central Tendency
Age in years 0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80
NOTES

No of persons 40 50 64 80 82 70 20 16

Solution:
Mid Mid
Item Frequenc |xi – fi |xi – Item Frequenc
poin fixi poin fixi
s y fi Me| Me| s y fi
t xi t xi

0- 31.4 1258. 0-
5 40 200 5 40 200
10 7 8 10

10- 21.4 1073. 10-

15 50 750 15 50 750
20 7 5 20

20- 11.4 734.0 20-

25 64 1600 25 64 1600
30 7 8 30

30- 30-
35 80 2800 1.47 117.6 35 80 2800
40 40

40- 776.5 40-

45 82 3690 9.47 45 82 3690
50 4 50

50- 19.4 1362. 50-

55 70 3850 55 70 3850
60 7 9 60

60- 29.4 60-

65 20 1300 589.4 65 20 1300
70 7 70

70- 39.4 631.5 70-

75 16 1200 75 16 1200
80 7 2 80

Ʃ fi |xi
– Me|
Ʃ fixi
N = 422 =1539 6544.3
0 4

Self-Instructional Material

47
Measures of Central Tendency Ʃ fixi 15390
Median = = = 𝟑𝟔. 𝟒𝟕
NOTES N 422
f |x − Me| f |D| 6544.34
Mean Deviation = = = = = 15.5079
N N 422
MD 15.5079
Coefficient of MD = = = 0.4252
Me 36.47
Merits of Mean Deviation:
 It is simple to understand and easy to compute.
 It is based on each and every item of the data.
 MD is less affected by the values of extreme items than the
Standard deviation.
Demerits of Mean Deviation:
 The greatest drawback of this method is that algebraic signs are
ignored while taking the deviations of the items.
 It is not capable of further algebraic treatments.
 It is much less popular as compared to standard deviation.
2.11 STANDARD DEVIATION
The concept of Standard Deviation was introduced by Karl
Pearson in 1893. It is by far the most important and widely used measure
of dispersion. Its significance lies in the fact that it is free from those
defects which afflicted earlier methods and satisfies most of the
properties of a good measure of dispersion. Standard Deviation is also
known as root-mean square deviation as it is the square root of means of
the squared deviations from the arithmetic mean.
The standard deviation is defined as the positive square root of
the mean of the square deviations taken from the arithmetic mean of the
data
Ungrouped data
x1 , x2 , x3 ... xn are the ungrouped data then standard deviation is
calculated bythere are two methods of calculating standard deviation in
an individual series
 Actual mean method
 Assumed mean method
Actual Mean Method:
Ʃ(X − X̅ )2
Standard deviation σ =
n
Example:
Calculate the standard deviation from the following data 28, 44,
Self-Instructional Material 18, 30, 40, 34, 24, 22.
48
 Measures of Central Tendency

NOTES

Solution:
Deviations from actual mean

Values (X) X - X̅ (X - X̅ )2

28 -2 4

44 -14 196

18 -12 144

30 0 0

40 10 100

34 4 16

24 -6 36

22 -8 64

240 560

240
𝑋= = 30
8
Ʃ(X − X̅ )2 560
σ = = = 70 = 𝟖. 𝟑𝟔𝟔𝟔
n 8
Assumed Mean Method
This method is used when the arithmetic mean is fractional value.
Taking deviations from fractional value would be a very difficult and
tedious task. To save time and labour a short cut method is used;
deviations are taken from a assumed mean.
2
Ʃd2 Ʃd
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 σ = −
n 𝑛
Example:
The marks obtained by the college students in statistics. Using the
following data calculate standard deviation.
Self-Instructional Material

49
Measures of Central Tendency

NOTES
Students No: 1 2 3 4 5 6 7 8 9 10

Marks 53 58 46 67 32 70 35 68 88 99

Solution: Deviations from assumed mean

Students No Marks ( x) d = X – A ( A=67) d2

1 53 -14 196

2 58 -9 81

3 75 8 64

4 67 0 0

5 32 -35 1225

6 70 3 9

7 35 -32 1024

8 68 1 1

9 88 21 441

10 69 2 4

Ʃ d2 =
n = 10 Ʃd = -55
3045

2
Ʃd2 Ʃd
σ= −
n 𝑛

2
3045 −55
= − = 304.5 − 30.25 = 274.25
10 10
= 𝟏𝟔. 𝟓𝟔𝟎𝟓
2.11.1 CALCULATION OF STANDARD DEVIATION
Discrete series: There are three methods for calculating standard
deviation in discrete series. They are
a) Actual mean method
b) Assumed mean method
Self-Instructional Material c) Step deviation method
50
Actual mean method Measures of Central Tendency

Calculate the mean of the series. Find the deviations for various NOTES
items from the means and square the deviations and multiply by the
respective frequency and total the product the formula to calculate actual
mean method is
Ʃ𝐟𝐝𝟐
𝛔=
Ʃ𝐟
If the actual mean is fractions, the calculation takes lot of time
and labour; and as such this method is rarely used in practice
Assumed mean method
Here deviation is taken not from an actual mean but from an
assumed mean. Also this method is used, if the given variable values are
not in equal intervals.
Ʃ𝐝𝟐 Ʃ𝐝 𝟐
𝛔= − where d = X – A, N = Ʃf
𝐟 𝒇

Example:
Calculate standard deviation from the following data:

X 20 22 25 31 35 40 42 45

f 5 12 15 20 25 14 10 6

Solution:
Deviation from assumed mean

x f d = X-A d2 fd fd2
(A=31)

20 5 -11 121 -55 605

22 12 -9 81 -108 972

25 15 -6 36 -90 540

31 20 0 0 0 0

35 25 4 16 100 400

40 14 9 81 126 1134
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42 10 11 121 110 1210
51
 Measures of Central Tendency
45 6 14 196 84 504
NOTES
N= 107 Ʃfd = 167 Ʃ fd2 = 5365

Curriculum Ʃfd 2 Ʃfd 2 5365 167 2

σ = − = − = 50.16 − 2.44 = 𝟔. 𝟗𝟏
f 𝑓 107 107
NOTES Step – deviation method:
If the variable values are in equal intervals, then we adopt this
method
Ʃfd 2 Ʃfd 2
S𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 σ = − XC
N 𝑁

Example:
The frequency distribution of marks in mathematics given in the table

Marks 30 40 50 60 70 80 90

No of students 8 12 20 10 7 3 2

Solution:

Marks x f d= (x-50)/ 10 fd fd2

30 8 -2 -16 32

40 12 -1 -12 12

50 20 0 0 0

60 10 1 10 10

70 7 2 14 28

80 3 3 9 27

90 2 4 8 32

N = 62 Ʃfd = 13 Ʃfd2 = 141

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52

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 Measures of Central Tendency
2
Ʃfd2 Ʃfd
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 σ = − XC NOTES
N 𝑁

2
141 13
= − X 10 = 1.4934 X 10 = 𝟏𝟒. 𝟗𝟑𝟒
62 62

Combined Mean and Combined Standard Deviation

Combined arithmetic mean can be computed if we know the
mean and number ofitems in each group of the data.
x̅1, x̅2, σ1, σ2 are mean and standard deviation of two data sets having n1
and n2 asnumber of elements respectively.

Example:
Particulars regarding income of two company are given below:

Company

A B

No.of Employees 600 500

Average income 1500 1750

Standard deviation of income 10 9

Compute combined mean and combined standard deviation.

Solution:
Given n1 = 600 ; x̅1 = 1500 ; σ1 = 10
n2 = 500 ; x̅2 = 1750 ; σ2 = 9
600 x 1500 + 500 x 1750 900000 + 875000
= =
600 + 500 1100

= 1613.6363 Self-Instructional Material

Combined Standard Deviation:
53
Measures of Central Tendency

NOTES
d1 = x̅12 - x̅1 = 1613.6363 -1500 = 113.6363
d2 = x̅12 - x̅2 = 1613.6363 – 1750 = -136.3637
600 100 + 12913 .209 +500 (81+18595 .0587 )
σ12 = 600 + 500

= 124.8488
Merits of Standard Deviation:
Among all measures of dispersion Standard Deviation is
considered superior because it possesses almost all the requisite
characteristics of a good measure of dispersion. It has the following
merits:
 It is rigidly defined.
 It is based on all the observations of the series and hence it is
representative.
 It is amenable to further algebraic treatment.
 It is least affected by fluctuations of sampling.
Demerits:
 It is more affected by extreme items.
 It cannot be exactly calculated for a distribution with open-ended
classes.
 It is relatively difficult to calculate and understand.
2.12 COEFFICIENT OF VARIATION
The coefficient of variation (CV) is a statistical measure of the dispersion
of data points in a data series around the mean. The coefficient of
variation represents the ratio of the standard deviation to the mean, and it
is a useful statistic for comparing the degree of variation from one data
series to another, even if the means are drastically different from one
another.
Coefficient of Variation = (Standard Deviation / Mean) * 100.
σ
CV = X 100
x
The coefficient of variation (CV) is a measure of relative
variability. It is the ratio of the standard deviation to the mean (average).
For example, the expression “The standard deviation is 15% of the mean
is a CV.
The CV is particularly useful when you want to compare results
from two different surveys or tests that have different measures or values.
For example, if you are comparing the results from two tests that have
Self-Instructional Material
54
different scoring mechanisms. If sample A has a CV of 12% and sample Measures of Central Tendency
B has a CV of 25%, you would say that sample B has more variation, NOTES
relative to its mean.
Example:
Price of car in five years in two cities is given below:

Price in city A Price in city B

20,00000 10,00000

22,00000 20,00000

19,00000 18,00000

23,00000 12,00000

16,00000 15,00000

Which city has more stable prices?

Solution:

City A City B

Price X Deviation dx2 Price Y Deviation dy2

(in lakhs) x̅ = 20 (in lakhs) ̅y = 15
dx dx

20 0 0 10 -5 25

22 2 4 20 5 25

19 -1 1 18 3 9

23 3 9 12 -3 9

16 -4 16 15 0 0

Ʃx = 100 Ʃdx = 0 Ʃdx2 Ʃy = 75 Ʃdy = 0 Ʃdy2

=30 =68

City A: x̅ = Ʃx / n = 100 / 5 = 20
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55
Measures of Central Tendency
(X − X)2 dx 2 30
σx = = = = 2.45
NOTES
n n 5
σ 2.45
C. V. X = X 100 = X 100 = 𝟏𝟐. 𝟐𝟓%
x 20
City B: x̅ = Ʃx / n = 75 / 5 = 15

(y − y)2 dy2 68
σy = = = = 3.69
n n 5
σ 3.69
C. V. Y = X 100 = X 100 = 𝟐𝟒. 𝟔%
y 15
City A had more stable prices than City B, because the coefficient of
variation is less in City A.

CHECK YOUR PROGRESS - 2

5. What is the coefficient of mean deviation?

6. What does standard deviation mean?

7. What is a measure of relative variability?

2.13 SUMMARY
 Measures of central tendency fail to reveal the degree of the
spread out or the extent of the variability in individual items of
the distribution. Dispersion is the extent till which a distribution
can be stretched or squeezed
 A range is the most common and easily understandable measure
of dispersion. It is the difference between the largest and smallest
observations in the data set.
Coefficient of range = (L-S) / (L + S)
 The quartiles divide a data set into quarters. The first quartile,
(Q1) is the middle number between the smallest number and the
median of the data. The third quartile, (Q3) is the middle number
between the median and the largest number. Quartile deviation is
half of the difference between the first and third quartiles. Hence
it is called as Semi Inter Quartile Range
 The average deviation, it is defined as the sum of the deviations
from an average divided by the number of items in a distribution
The average can be mean, median or mode.
 The standard deviation is defined as the positive square root of
the mean of the square deviations taken from the arithmetic mean
of the data.
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56
  The coefficient of variation (CV) is a statistical measure of the Measures of Central Tendency
dispersion of data points in a data series around the mean. NOTES

2.14 KEY WORDS

Measures of dispersion, range quartile deviation, mean deviation,
standard deviation, and coefficient of variable.
2.15 ANSWERS TO CHECK YOUR PROGRESS
1. Dispersion is the extent till which a distribution can be stretched
or squeezed.
2. The grouped frequency distribution of values in the data set, the
range is the difference between the upper class limit of the last
class interval and the lower class limit of the first class interval.
3. Coefficient of Q.D = Q3 – Q1 / Q3 + Q1
4. All the drawbacks of Range are overcome by quartile deviation
𝑀𝐷
5. Coefficient of MD =
𝑀𝑒
6. The standard deviation is defined as the positive square root of
the mean of the square deviations taken from the arithmetic mean
of the data.
σ
7. Coefficient of variation (CV) CV = x X 100

2.16 QUESTIONS AND EXERCISE

SHORT ANSWER QUESTIONS

 What is dispersion? How is it advantageous over the measures of
central tendency?
 Write short notes on range
 What is Coefficient of variation? Explain
 Write about mean deviation
LONG ANSWER QUESTIONS
 Calculate mean deviation under assumed mean method

Marks 30 40 50 60 70 80 90

No of students 16 24 40 20 14 6 4

 Give a detained account on standard deviation.

 Calculate the quartile deviation and its coefficient for the corn
production (in Kg) of 25 acres is given as: 1100, 1340, 1370,
1050, 1780, 1200, 2440, 1390, 1480, 1780, 1783, 1542, 1970,
1680, 1775, 1320, 1680, 1770, 1780 and1889.
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57
Measures of Central Tendency

NOTES 2.17 FURTHER READINGS

1. Levin, Richard I. and David S. Rubin: Statistics for Management,
PrenticeHall, New Delhi.
2. Watsman terry J. and Keith Parramor: Quantitative Methods in
FinanceInternational, Thompson Business Press, London.
3. Hooda, R. P.: Statistics for Business and Economics, Macmillan,
New Delhi.
4. Hein, L. W. Quantitative Approach to Managerial Decisions,
Prentice Hall, NJ

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58
 UNIT III - PROBABILITY Probability

NOTES
Structure
3.0 Introduction
3.1 Objectives
3.2 Importance Terms
3.3Types of Probability
3.4 Basic relationship of Probability
3.5 Addition Theorem of Probability
3.6 Multiplication Theorem of Probability
3.7. Condition Probability
3.7.1 Combined Use Of Addition And Multiplication Theorem
3.8 Baye‟s Theorem and its application
3.9 Summary
3.10 Key Words
3.11 Answer to Check Your Progress
3.12 Questions and Exercise
3.3 Further Readings
3.0 INTRODUCTION
In our day to day life the “probability” or “chance” is very
commonly used term. Sometimes, we use to say “Probably it may rain
tomorrow”, “Probably Mr. X may come for taking his class today”,
“Probably you are right”. All these terms, possibility and probability
convey the same meaning. But in statistics probability has certain special
connotation unlike in Layman‟s view.
The theory of probability has been developed in 17th century. It
has got its origin from games, tossing coins, throwing a dice, drawing a
card from a pack. In 1954 Antoine Gornband had taken an initiation and
an interest for this area.
After him many authors in statistics had tried to remodel the idea
given by the former. The “probability” has become one of the basic tools
of statistics. Sometimes statistical analysis becomes paralyzed without
the theorem of probability. “Probability of a given event is defined as the
expected frequency of occurrence of the event among events of a like
sort.” (Garrett)
The probability theory provides a means of getting an idea of the
likelihood of occurrence of different events resulting from a random
experiment in terms of quantitative measures ranging between zero and Self-Instructional Material

59
 Probability one. The probability is zero for an impossible event and one for an event
which is certain to occur.
NOTES

3.1 OBJECTIVES
The students will be able to understand
 The important terms in probability
 Concept of conditional probability, addition theorem and
multiplication theorem.
 Baye‟s theorem and its applications
3.2 IMPORTANT TERMS
1. Probability or Chance: Probability or chance is a common term
used in day-to-day life. For example, we generally say, 'it may
rain today'. This statement has a certain uncertainty. Probability is
quantitative measure of the chance of occurrence of a particular
event.
2. Experiment: An experiment is an operation which can produce
well-defined outcomes.

3. Random Experiment: If all the possible outcomes of an

experiment are known but the exact output cannot be predicted in
advance, that experiment is called a random experiment.
Examples: Tossing of a fair coin: When we toss a coin, the
outcome will be either Head (H) or Tail (T)

4. Trial : Any particular performance of a random experiment is

called trial
Example: Tossing 4 coins, rolling a die, picking ball from a bag
containing 10 balls of which 4 is red and 6 is blue.

5. Event :Any subset of a Sample Space is an event. Events are

generally denoted by capital letters A, B , C, D etc.
Examples:
i. When a coin is tossed, outcome of getting head or tail is
an event
Types of Events:
 Simple Events: In the case of simple events, we take
the probability of occurrence of single events.
Examples: Probability of getting a Head (H) when a coin
is tossed
 Compound Events: In the case of compound events,
we take the probability of joint occurrence of two or
more events
Self-Instructional Material Examples: When two coins are tossed, probability of
getting a Head (H) in the first toss and getting a Tail
60
 (T) in the second toss.. Probability

NOTES
6. Sample Space :Sample Space is the set of all possible outcomes
of an experiment. It is denoted by S.
Examples : When a coin is tossed, S = {H, T} where H =
Head and T = Tail
7. Mutually Exclusive Events: Two or more than two events are
said to be mutually exclusive if the occurrence of one of the
events excludes the occurrence of the other
Example :When a coin is tossed, we get either Head or Tail.
Head and Tail cannot come simultaneously. Hence occurrence of
Head and Tail are mutually exclusive events.

8. Equally Likely Events: Events are said to be equally likely if

there is no preference for a particular event over the other.
Examples: When a coin is tossed, Head (H) or Tail is equally
likely to occur.
9. Independent Events: Events can be said to be independent if the
occurrence or non-occurrence of one event does not influence the
occurrence or non-occurrence of the other.
Example:
i. When a coin is tossed twice, the event of getting Tail(T) in
the first toss and the event of getting Tail(T) in the second
toss are independent events. This is because the
occurrence of getting Tail(T) in any toss does not
influence the occurrence of getting Tail(T) in the other
toss.
10. Exhaustive Events: Exhaustive Event is the total number of all
possible outcomes of an experiment.
Examples: When a coin is tossed, we get either Head or Tail.
Hence there are 2 exhaustive events.
11. Favorable Events: The outcomes which make necessary the
happening of an event in a trial are called favorable events.
Examples:if two dice are thrown, the number of favorable events
of getting a sum 5 is four, i.e., (1, 4), (2, 3), (3, 2) and (4, 1).
3.3 TYPES OF PROBABILITY
1. Classical Approach ( Priori Probability):
According to this approach, the probability is the ratio of
favorable events to the total no. of equally likely events. In
tossing a coin the probability of the coin coming down ids 1, of
the head coming up is ½ and of the tail coming up is ½.
The probability of one event as „P‟ (success) and of the other Self-Instructional Material
event as „q‟ (failure) as there is no third event.
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 Probability

NOTES Number of favourable cases

p = Total number of equally likely cases

If an event can occur in „a‟ ways and fail to occur in „b‟ ways and
these are equally to occur, then the probability of the event
occurring, a/a+b is
denoted by p. Such probabilities are known as unitary or
theoretical or mathematical probability.
p is the probability of the event happening and q is the probability
of its not happening.

𝑎 𝑏
p =𝑎 +𝑏 and q = 𝑎 +𝑏

𝑎 +𝑏
Hence p+q =𝑎 +𝑏

Therefore p+q = 1

Probabilities can be expressed either as ratio,fraction or

percentage, such as ½ or 0.5 or 50%.Example: Tossing of a coin.

Limitations:
o This definition is confined to the problemsof games of
chance only and can notexplain the problem other than the
gamesof chance.
o This method can not be applied, when theoutcomes of a
random experiment are notequally likely.
o The classical definition is applicable onlywhen the events
are mutually exclusive.

2. Relative Frequency Theory of Probability:

In this approach, the probability of happening ofan event is

determined on the basis of past experience or on the basis of
relative frequency of success in the past.

Example:If a machine produces 100 articles in the past, 2 articles

were found to be defective, and then the probability of the
defective articles is 2/100 or 2%.
The relative frequency obtained on the basis of past experience
can be shown to come to very close to the classical probability.

Limitations:
Self-Instructional Material o The experimental conditions may not remain essentially
homogeneous and identical in a large number of
62
 repetitions of the experiment. Probability
o The relative frequency m/n, may not attain aunique value
NOTES
no matter however large.
o Probability p(A) defined can never be obtainedin practice.
We can only attempt at a closeestimate of p(A) by making
N sufficiently large.

3. Subjective Approach :
The subjective approach is also known as subjective
theory of probability. The probability of an event is considered as
a measure of one‟s confidence in the occurrence of that particular
event
This theory is commonly used in business decision making. The
decision reflects the personality of the decision maker. Persons
may arrive at different probability assignment because of
differences in value at experience etc. The personality of the
decision maker is reflected in a final decision. The decision under
this theory is taken on the basis of the available data plus the
effects of other factors many of which may be subjective in
nature.
Example:A student would top in B. Com Exam this year.
A subjective would assign a weight between zero and one to this
event according to his belief for its possible occurrence.

4. Axiomatic Approach:
The probability calculations are based on the axioms. The
axiomatic probability includes the concept of both classical and
empirical definitions of probability.
The approach assumes finite sample spaces and is based on the
following three axioms:
i) The probability of an event ranges from 0 to 1.If the event
cannot take place its probability shall be „0‟ and if it is
bound to occur its probability is„1‟.
ii) The probability of the entire sample space is 1, i.e. p(S)=1.
iii) If A and B are mutually exclusive events then the
probability of occurrence of either A or B denoted
byp(AUB) = p(A) + p(B)
iv) If A and B are happening together events then the
probability of occurrence of probability of A intersection
B denoted by p (A∩ B) = p(A) . p(B)
3.4 BASIC RELATIONSHIPS OF PROBABILITY
There are some basic probability relationships that can be used to
compute the probability of an event without knowledge of all the
sample point probabilities.
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63
 Probability

NOTES

Complement of an
Event:The complement of
any even A is the even (not
A),i.e, the event that A does
not occur. The event A and
its complement (not A) are
mutually exclusive and
exhaustive.it is denoted Aʹ ,
Ac or 𝐴

Union of Two Events:

the union of events A and
B is the event containing
all sample points that are
in A or B or both. It is
denoted by AUB

Intersection of Two
Events: The intersection
of events A and B is the
set of all sample points
that are in both A and B.
it is denoted by A∩ B

o Mutually
Exclusive Events: two sets
are mutually exclusive ( also
called disjoint) if they do not
have any elements in
common; they need not
together comprise the
universal set.

3.5 ADDITION THEOREM OF PROBABILITY

The probability of an event in a random experiment as well as axiomatic
approach formulated by Russian Mathematician A.N. Kolmogorov and
observed that probability as a function of outcomes of an experiment. By
now you know that the probability P(A) of an event A associated with a
discrete sample space is the sum of the probabilities assigned to the
sample points in A as discussed in axiomatic approach of probability.
Here we will learn Addition Theorem of Probability to find probability of
occurrence for simultaneous trials under two conditions when events are
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64
 1. Addition Theorem For Mutually Exclusive Events Probability

Statement: If A and B are two mutually exclusive events, then the NOTES
probability of occurrence of either A or B is the sum of the individual
probabilities of A and B. Symbolically

Proof : Let N be the total number exhaustive and equally likely cases of
an experiment. Let m1 and m2 be the number of cases favourable to the
happening of events A and B respectively. Then

and

.
Since the events A and B are mutually exclusive, the total number of
events favorable to either A or B i.e. n(A∪B) = m1 +m2, then

Example 1: A card is drawn at random from a pack of 52 cards. Find the

probability that the drawn card is either a club or an ace of diamond.
Solution : Let A : Event of drawing a card of club and
B: Event of drawing an ace of diamond

The probability of drawing a card of club

The probability of drawing an ace of diamond

Since the events are mutually exclusive, the probability of the drawn card
being a club or an ace of diamond is:

2. Addition Theorem For Non-Mutually Exclusive Events

The addition theorem discussed above is not applicable when the
events are not mutually exclusive. For example, if one card is drawn at
random from a pack of 52 cards then in order to find the probability of
either a spade or a king card, it cannot be calculated by simply adding the
probabilities of spade and king card because the events are not mutually
exclusive as there is one card which is a spade as well as a king. Thus,
the events are not mutually exclusive; therefore, the addition theorem is Self-Instructional Material

65
 Probability modified as:
NOTES Statement: If A and B are not mutually exclusive events, the probability
of the occurrence of either A or B or both is equal to the probability that
event A occurs, plus the probability that event B occurs minus the
probability of occurrence of the events common to both A and B. In other
words the probability of occurrence of at least one of them is given by

Proof: Let us suppose that a random experiment results in a sample

space S with N sample points (exhaustive number of cases). Then by
definition

Where n(A∪B) is the number of occurrences (sample points) favorable to

the event (A∪B)

Addition theorem for non-mutually exclusive events

From the above diagram, we get:

Example 2
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66
that the drawn card is either a spade or a king. Probability

Solution: Let A: Event of drawing a card of spade and NOTES

B: Event of drawing a king card

The probability of drawing a card of spade

The probability of drawing a king card

Because one of the kings is a spade card also therefore, these events are
not mutually exclusive. The probability of drawing a king of spade is

So, the probability of the drawing a spade or king card is:

3.6 MULTIPLICATION THEOREM OF PROBABILITY

In the addition theorem of probability for mutually exclusive events as
well as for those events which are not mutually exclusive. In many
situations we want to find the probability of simultaneous occurrence of
two or more events. Sometimes the information is available that an event
A has occurred and one is required to find the probability of occurrence
of another event B utilizing the information about event A. Such a
probability is known as conditional probability. Here we shall discuss the
important concept of conditional probability of an event which will be
helpful in understanding the concept of multiplication theorem of
probability as well as independence of events.
1. Multiplication Theorem for Independent Events
Statement: This theorem states that if two events A and B are
independent then the probability that both of them will occur is equal to
the product of their individual probabilities.
P (AB) = P (A∩B) = A (A and B) = P (A). P (B)
Proof
If an event A can happen in n1 ways out of which a1 are favorable and the Self-Instructional Material

67
 Probability event B can happen in n2 ways out of which a2 are favorable, we can
combine each favorable event in the first with each favorable event in the
NOTES
second case. Thus, the total number of favorable cases is a 1 x a2.
Similarly, the total number of possible cases is n1 x n2. Then by definition
the probability of happening of both the independent events is

Similarly we can extend the theorem to three events

P (A∩B∩C) = P (A) . P (B/A) .P(C/A . B)

Example 1. From a pack of 52 cards, two cards are drawn at random one
after the other with replacement. What is the probability that both cards
are kings?
Solution:
4
The probability of drawing a king P (A) =52
4
The probability of drawing again the king after replacement P (B) = 52
Since the two events are independent, the probability of drawing two
kings is:

2. Multiplication Theorem of Probability for Dependent Events

Statement: The probability of simultaneous happening of two events A
and B is given by:

Where P (B|A) is the conditional probability of happening of B under the

condition that A has happened and P (A|B) is the conditional probability
of happening of A under the condition that B has happened.
Proof:
Let A and B be the events associated with the sample space S of a
random experiment with exhaustive number of outcomes (sample points)
N, i.e., n(S) = N. Then by definition
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68
 Probability

NOTES
For the conditional event A|B (i.e., the happening of A under the
condition that B has happened), the favorable outcomes (sample points)
must be out of the sample points of B. In other words, for the event A|B,
the sample space is B and hence

Similarly, we have

On multiplying and dividing equation (1) by n (A), we get

Also

Example
A bag contains 5 white and 8 red balls. Two successive drawings of 3
balls are made such that (a) the balls are replaced before the second
drawing, and (b) the balls are not replaced before the second draw. Find
the probability that the first drawing will give 3 white and the second 3
red balls in each case.
Solution:
(a) When balls are replaced.
Total balls in the bag = 8 + 5 = 13
3 balls can be drawn out of total of 13 balls in 13C3 ways.
3 white balls can be drawn out of 5 white balls in 5 C3 ways.

Probability of 3 white balls =

Since the balls are replaced after the first draw so again there are
13 balls in the bag 3 red balls can be drawn out of 8 red balls
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in 8C3 ways.
69
 Probability

NOTES
Probability of 3 red balls =
Since the events are independent, the required probability is:

(b) When the balls are not replaced before second draw
Total balls in the bag = 8 + 5 = 13
3 balls can be drawn out of 13 balls in 13C3 ways.
3 white balls can be drawn out of 5 white balls in 5 C3 ways.

The probability of drawing 3 white balls =

After the first draw, balls left are 10, 3 balls can be drawn out of
10 balls in 10C3 ways.
3 red balls can be drawn out of 8 balls in 8C3 ways. Probability of

drawing 3 red balls = .

Since both the events are dependent, the required probability is:

3.7 CONDITIONAL PROBABILITY

When the occurrence of an event A and are required to find out the
probability of the occurrence of another event B. Two events A and B are
said to be dependent when event A can occur only when event B is
known to have occurred (or vice versa). The probability attached to such
an event is called the conditional probability and is denoted by P (A|B) or
in other words, probability of A given that B has occurred. For example,
if we want to find the probability of an ace of spade if we know that card
drawn from a pack of cards is black. Let us consider another problem
relating to dairy plant. There are two lots of full cream packets A and B,
each containing some defective packets. A coin is tossed and if it turns up
with its head upside lot A is selected and if it turns with tail up, lot B is
selected. In this problem we are interested to know the probability of the
event that a milk packet selected from the lot obtained in this manner is
defective.
Definition: If two events A and B are dependent, then the conditional
probability of B given that event A has occurred is defined as
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 Probability

NOTES

Let us consider the experiment of throwing of a die once. The sample

space of this experiment is {1, 2, 3, 4, 5, and 6}.
Let E1: an even number and E2: multiple of 3 p.
Then E1: {2, 4, 6} and E2: {3, 6}.
Hence, P (E1) = 3/6 = 1/2 and P (E1) = 2/6 =1/3
In order to find the probability of occurrence of E2 when it is given that
E1 has occurred We know that in a single throw of die2or4or 6has come
up. Out of these only 6 is favorable to E2. So the probability of
occurrence of E2 when it is given that E1 has occurred is equal to 1/3. This
probability of E2 when E1 has occurred is written as
P (E2|E1). Here we find that P (E2|E1) =P (E2).
Let us consider the event
E3: a number greater than 3 then E3:{4,5,6} and P(E3)=3/6=1/2
Out of 2,4 and 6, two numbers namely 4 and 6 are favorable to E 3.

Therefore, P (E3|E1) =2/3.

The events of the type E1 and E2 are called independent events as the
occurrence or non-occurrence of E1 does not affect the probability of
occurrence or non-occurrence of E2. The events E1and E3 are
not independent.
3.7.1 Combined Use Of Addition And Multiplication Theorem
In probability both addition and multiplication theorems are used
simultaneously. The following examples illustrate the combined use of
addition and multiplication theorems.
Example
A bag contains 5 white and 4 black balls. A ball is drawn from this bag
and is replaced and then second draw of a ball is made. What is the
probability that two balls are of different colors.
Solution: There are two possibilities
i) First ball is white and the second ball drawn is black.
ii) First ball is black and the second ball drawn is white.
Since the events are independent, so by using multiplication theorem we
have
i) Probability of drawing First ball white and the second ball
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 Probability

NOTES black =

ii) Probability of drawing First ball black and the second ball white

=
Since these probabilities are mutually exclusive, by using addition
theorem

Probability that two balls are of different colors =

CHECK YOUR PROGRESS

1. What is sample space?

2. What is an event?

3. Write the formula for addition probability theorem

4. Mention the types of probability

5. How Baye‟s theorem is calculated

3.8 BAYES’ THEOREM AND ITS APPLICATIONS

There are many situations where the ultimate outcome of an
experiment tdepends on what happens in various intermediate
stages. This issue is resolved by the Bayes‟
There is a very big difference between P(A | B) and P(B | A)

Suppose that a new test is developed to identify people who are

liable to suffer from some genetic disease in later life. Of course, no test
is perfect; there will be some carriers of the defective gene who test
negative, and some non-carriers who test positive. So, for example, let A
be the event „the patient is a carrier‟, and B the event „the test result is
positive‟.
The scientists who develop the test are concerned with the probabilities
that the test result is wrong, that is, with P(B | Aʹ ) and P(Bʹ | A).
However, a patient who has taken the test has different concerns.
If I tested positive, what is the chance that I have the disease?
If I tested negative, how sure can I be that I am not a carrier? In other
words, P(A | B) and P(A ʹ | B ʹ ).

These conditional probabilities are related by Bayes‟ Theorem:

Let A and B be events with non-zero probability. Then
Self-Instructional Material 𝐏(𝐁 | 𝐀)·𝐏(𝐀)
P(A | B) =
𝐏(𝐁)
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 Probability
The proof is not hard. We have
NOTES
P(A | B)·P(B) = P(A∩B) = P(B | A)·P(A),
using the definition of conditional probability twice. (Note that we need
both A and B to have non-zero probability here.) Now divide this
equation by P(B) to get the result.

If P(A) ≠ 0,1 and P(B)≠ 0, then

𝐏(𝐁 | 𝐀)·𝐏(𝐀)
P(A | B) = .
𝐏(𝐁 | 𝐀)·𝐏(𝐀) +𝐏(𝐁 | 𝐀ʹ)·𝐏(𝐀ʹ)

Bayes‟ Theorem is often stated in this form.

Example
Consider the clinical test described at the start of this section. Suppose
that 1 in 1000 of the population is a carrier of the disease. Suppose also
that the probability that a carrier tests negative is 1%, while the
probability that a non carrier tests positive is 5%. (A test achieving these
values would be regarded as very successful.) Let A be the event „the
patient is a carrier‟, and B the event „the test result is positive‟. We are
given that P(A) = 0.001 (so that P(Aʹ ) = 0.999), and that
P(B | A) = 0.99, P(B | A ʹ ) = 0.05.
(a) A patient has just had a positive test result. What is the probability
that the patient is a carrier? The answer is
𝐏(𝐁 | 𝐀)·𝐏(𝐀)
P(A | B) = 𝐏(𝐁 | 𝐀)·𝐏(𝐀) +𝐏(𝐁 | 𝐀ʹ)·𝐏(𝐀ʹ)

0.99×0.001
=
0.99×0.001 + (0.05×0.999)

0.00099
= 0.05094 = 0.0194.
(b) A patient has just had a negative test result. What is the
probability that the patient is a carrier? The answer is
P(Bʹ | A)P(A)
P(A | Bʹ ) = P(Bʹ | A)P(A)+ P(Bʹ | Aʹ)P(Aʹ)

0.01×0.001
= (0.01×0.001 )+ (0.95×0.999)

0.00001
= = 0.00001.
0.94095

3.9 SUMMARY
 Bayes‟ Theorem is often stated in the form. If P(A) ≠ 0,1 and
P(B)≠ 0, then
𝐏(𝐁 | 𝐀)·𝐏(𝐀)
P(A | B) = 𝐏(𝐁 | 𝐀)·𝐏(𝐀) +𝐏(𝐁 | 𝐀ʹ)·𝐏(𝐀ʹ) Self-Instructional Material

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 Probability  Conditional Probability: Two events A and B are said to be
dependent when event A can occur only when event B is known
NOTES
to have occurred (or vice versa).
 Multiplication Probability :The probability of simultaneous
occurrence of two or more events
 Addition Probability: If A and B are not mutually exclusive
events, the probability of the occurrence of either A or B or both
is equal to the probability that event A occurs, plus the probability
that event B occurs minus the probability of occurrence of the
events common to both A and B
 Types Of Probability: Axiomatic Approach,Classical Approach
,Relative Frequency Theory of Probability,Subjective Approach
3.10 KEY WORDS
Probability, Sample, Events, Variables, Addition theorem, Multiplication
theorem, Axiomatic approach, Classical approach, Relative frequency
theory, Subjective approach, Baye‟s theorem
3.11 ANSWER TO CHECK YOUR PROGRESS
1. Sample Space :Sample Space is the set of all possible
outcomes of an experiment. It is denoted by S
2. Event :Any subset of a Sample Space is an event. Events
are generally denoted by capital letters A, B , C, D etc.
3. Addition Theorem For Mutually Exclusive Events

Addition Theorem For Non-Mutually Exclusive Events

4. Types Of Probability: Axiomatic Approach,Classical

Approach ,Relative Frequency Theory of
Probability,Subjective Approach
5. Bayes‟ Theorem is often stated in the form. If P(A) ≠ 0,1
and P(B)≠ 0, then
𝐏(𝐁 | 𝐀)·𝐏(𝐀)
P(A | B) = 𝐏(𝐁 | 𝐀)·𝐏(𝐀) +𝐏(𝐁 | 𝐀ʹ)·𝐏(𝐀ʹ)

3.12 QUESTIONS AND EXERCISE

SHORT ANSWER QUESTION:
1. Define probability
2. What are sample space
3. Define random variable
4. State the Baye‟s theorem
5. Explain mutually exclusive event
LONG ANSWER QUESTIONS:
1. Define probability and bring out the importance of probability
2. Distinguish between independent and dependents events
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3. Explain briefly Baye‟s theorem
74
 4. If 20% of the bottles produced by machine are defective, Probability
determine the probability that out of 4 bottles (i) 0, (ii) 1, (iii)
NOTES
at most 2 bottles will be defective
3.13 FURTHER READINGS
1. Statistics (Theory & Practice) by Dr. B.N. Gupta. SahityaBhawan
Publishers andDistributors (P) Ltd., Agra.
2. Statistics for Management by G.C. Beri. Tata McGraw Hills
Publishing CompanyLtd., New Delhi.
3. Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw HillPublishing Company Ltd., New Delhi.
4. Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd., NewDelhi.
5. Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons.,NewDelhi.
6. Statistical Method by S.P. Gupta. Sultan Chand and Sons., New
Delhi.

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 probability distribution
UNIT IV - PROBABILITY
NOTES
DISTRIBUTION
Structure
4.0 Introduction
4.1 Objectives
4.2 Random Variable
4.3Types of Random Variable
4.4 Binomial Distribution
4.5 Poisson Distribution
4.6 Normal Distribution
4.7 Summary
4.8 Key Words
4.9 Answer to Check your progress
4.10 Questions and Exercise
4.11 Further Reading
4.0 INTRODUCTION
A probability distribution is a table or an equation that links each
outcome of a statistical experiment with its probability of occurrence. It
describes the range of possible values that a random variable can attain
and the probability that the value of the random variable is with any
subset of that range. For example if X is a random variable then denote
by P(X) to be the probability that X Occurs. It must be the case that 0<=
P(X) <= 1 for each value of X and ƩP(X) = 1 ( the sum of all the
probabilities is 1)
4.1 OBJECTIVES
The students will be able to understand
 The random variable and its types in probability distribution
 Concept of Binomial Distribution, Poisson Distribution and
Normal Distribution
 Concept of Mean and Standard deviation of Binomial and Poisson
Distribution

4.2 Random variable

3.2 RANDOM VARI ABLE

A random variable is defined as a real number X connected with

the outcome of a random experiment E. For example, if E consists of
three tosses of a coin, we may consider random variable X which denotes
the number of heads (0, 1, 2 or 3)
Outcome HHH HTH THH THH HTT THT TTH TTT
:

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 Value of 3 2 2 2 1 1 1 0 probability distribution
X:
NOTES

Thus, to every outcome there corresponds a real number X(w). Since the
points of the sample space corresponds to outcomes, this means that a
real number, which we denote by X(w), is defined for each w∈S and let
us denote them by w1, w2,….,w8 i.e.X(w1) = 3, X(w2)=2,…., X (w8 ) =0.
Thus,, we define a random variable as a real valued function whose
domain is the sample space associated with a random experiment and
range is the real line. Generally it is denoted by capital letters X,Y, Z, ---
etc.
4.3 TYPES OF RANDOM VARIABLE
1. Discrete random variable
If a random variable X assumes only a finite or countable set of
values, it is called a discrete random variable. In other words, a real
valued function defined on a discrete sample space is called a discrete
random variable. In case of discrete random variable we usually talk of
values at a point. Generally it represents counted data. For example,
number of defective milk packet in a milk plant, number of students in a
class etc.
2. Continuous random variable
A random variable is said to be continuous if it can assume
infinite and uncountable set of values. A continuous random variable is
in which different values cannot be put in one to one correspondence
with a set of positive integers. For example, weight of baby elephant take
any possible value in the interval of 160 kg to 260 kg, say 189 kg or
189.4356 kg; likewise, marks scored by the students in a class etc. In
case of continuous random variable we usually take the values in a
particular interval. Continuous random variables represent measured
data.
Probability Distribution of a Random Variable
The concept of probability distribution is equivalent to the
frequency distribution. It depicts how total probability of one is
distributed among various values which a random variable can take.

Mean and Variance of a Random variable

Let X denotes the random variable which assumes values x1,x2,---,xn with
corresponding probabilities p1,p2,---,pn .Then the probability distribution
be as follow:
X:

P(X):

Then

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 probability distribution

NOTES

The mean (μ) of the above probability distribution is defined as:

The variance (σ2) is defined as:

Mean of a random variable X is also known as expected value and is

denoted by E(X)

Example
A die is tossed twice. Getting a number greater than 4 is
considered a success. Find the variance of the probability distribution of
the number of success.
Solution:
Here p, probability of a number greater than 4=2/6=1/3 and q,

probability of a number not greater than

Thus, we have:

0 0 0 0

1 4/9 4/9 1 4/9

Hence, the
2 1/9 2/9 4 4/9

Total 6/9 8/9

mean

The variance
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 probability distribution

NOTES
4.4 BINOMIAL DISTRIBUTION
Binomial distribution is a discrete probability distribution. This
distribution was discovered by a Swiss Mathematician James Bernoulli
(1654-1705). A Bernoullian trial is an experiment having only two
possible outcomes i.e. success or failure. In other words the result of the
trial are dichotomous e.g. in tossing of a coin either head or tail, the sex
of a calf can be either male or female, a manufactured milk product or an
engineering equipment or spare part will be either defective or non
defective etc. This distribution can be used under the following
conditions:
a) The random experiment is performed repeatedly a finite and fixed
number of times i.e. n, the number of trials is finite and fixed.
b) The outcome of a trial results in the dichotomous classification of
events i.e. each trial must result in two mutually exclusive outcomes,
success or failure.
c) Probability of success (or failure) remains same in each trial i.e. in
each trail the probability of success, denoted by p remains constant. q=1-
p, is then termed as the probability of failure (non-occurrence).
d) Trials are independent i.e. the outcome of any trial does not affect the
outcomes of the subsequent trials.
Theorem:
If X denotes the number of successes in n trials satisfying the
above conditions, then X is a random variable which can take values
0,1,2,….,n i.e. no success, one success, two successes, ………, or all the
n successes. The general expression for the probability ofr successes is
n r n-r
given by:P(r) = P(X = r) = Crp q for r=0,1,2,….,n
Proof :
By the theorem of compound probability, the probability that r
trials are success and the remaining (n-r) are failures in a sequence of n
trials in a specified order say S,F,S,F,S,…..,S is given by

But we are interested in any r trials being successes and since r trials can
n
be chosen out of n trials in Cr(mutually exclusive) ways. Therefore, by
the theorem of total probability, the chance P (r) of r successes in a series
of n independent trials is given by

P (r) = nCrprqn-r 0≤r≤n

r can take only positive integer values. Self-Instructional Material

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 probability distribution Thus, the chance variate i.e. the number of successes, can take the values
0,1,2,..,r,..,n with corresponding probabilities
NOTES
qn,nC1 p qn-1,..,nCrprqn-r,..,pn
 The probability distribution of the number of successes so
obtained is called the binomial probability distribution for the
obvious reason that the probabilities are the various terms of the
binomial expansion of (q+p)n.

 The sum of probabilities

 The expression for P (X = r) is known as probability mass

function of the Binomial distribution with parameter n and p.
The random variable X following this probability law is called
binomial variate with parmeter n and p denoted as
X~B(n,p).Hence binomial distribution can be completely
determined if n and p are known .

Example :
It is known that 40 % patients affected by tuberculosis die every
year. 6 patients are admitted to a hospital suffering from tuberculosis.
What is the probability that
(i) Three patients will die.
(ii) at least patients will die
(iii) all patients will be cured
(iv) no patients will be saved.
Solution
we have p = 0.4 , q = 1- 0.40 = 0.6 and n=6
In binomial distribution we have
P(r) = nCr .pr .qn-r
(i) Prob. [Three patients will die]
P[r = 3] = P(3) = 6C3 . (0.4)3 (0.6)3

(ii) Prob. (at least five patients will die)

P(5) + P(6) = 6C5 (0.4)5 (0.6)1 + 6C6 (0.4)6(0.6)0
= 6 (0.4)5 (0.6)1 + (0.4)6
= 0.0369 +0.0041= 0.0410

(iii) Prob. (all patients will be cured) =1 - P (no patients will die)
1- P(0) =1 - 6C0 (0.4)0(0.6)6
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80
 = 1 - 0.0467 = 0.9533 probability distribution
(iv) Prob. (no patients will be saved) = P (all patients will die)
NOTES
= P(6)
= 6C6 (0.4)6 (0.6)0
= (0.4)6 =0.0041

Example of Binomial distribution

 The number of heads/tails in a sequence of coin flips

 Vote counts for two different candidates in an election

 The number of male/female employees in a company

 The number of accounts that are in compliance or not in

compliance with an accounting procedure

 The number of successful sales calls

 The number of defective products in a production run

Properties of Binomial Distribution

i) Mean of binomial distribution is np.

Proof: First raw moment

ii)Variance of binomial distribution is npq

Proof: Second raw moment

Variance
=
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 probability distribution For the binomial distribution if mean and variance are known, we
can arrive at the frequency distribution and variance is less than mean.
NOTES

iii) The third and fourth central moment μ3 and μ4 can be obtained on the
same lines.

iv) Pearson’s constants β1 & β2 as well as γ1 and γ2 are given by

γ1 shows that the binomial distribution is positively skewed if q > p or p

< 1/2 and it is negatively skewed if q < p or p >1/2 and it is symmetrical
if p = q = 1/2.The binomial distribution is leptokurtic if pq< 1/6and
latykurtic if pq> 1/6.
v) Mode of binomial distribution is determined by the value (n+1)p. If
this value is an integer equal to k then the distribution is bi-modal, the
two modal values being X=k and X=k-1.When this value is not an
integer then the distribution has unique mode at X=k1, the integral part of
(n+1)p.
vi) Additive property: If X1 is B(n1,p)and X2 is B(n2,p) and they are
independent then their sum X1 + X2 is also a binomial variate B(n1+ n2,p).
Example:
If the mean and variance of a Binomial Distribution are
respectively 9 and 6, find the distribution.
Solution: Mean of Binomial Distribution is np and variance is npq

Hence, the Binomial Distribution is

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i.e. probability distribution

NOTES
4.5 POISSON DISTRIBUTION
Poisson distribution is a limiting case of Binomial distribution
under the following conditions:
 n, the no. of trials is indefinitely large i.e., n→∞

 p, the constant probability of success for each trial is

indefinitely small i.e. p→0

 np= m (say) is finite. Thus, p = m/n, q = 1- m/n where m is a

positive real number.
Under, the above three conditions the probability mass function of
binomial distribution tends to the probability mass function of the
Poisson distribution whose definition and derivation given below:
A random variable X is said to follow a Poisson distribution if it
assumes only non-negative values and its probability mass function is
given by

where m is known as the parameter of the distribution.

e = 2.7183(the base of the natural logarithm)

Proof: As n→∞ and np = m

p = m/n and q = 1-m/n
Probability function of binomial distribution is
P (r) = nCr pr qn-r = n!/r!(n-r)! pr qn-r

Taking limit as n→∞

We know that

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 probability distribution

NOTES

Putting r = 0,1,2, ---- in above equation, we obtain the probabilities of r =

0,1,2, ---- successes respectively we get , , ,---

Total probability is 1:

----

If we know m, all the probabilities of the Poisson distribution can be

obtained, therefore m is the only parameter of the Poisson distribution.
The application of this distribution in solving problems is illustrated
through following examples.
Example
A manufacturer of screws knows that 5% of his product is
defective. If he sells his product in a carton of 100 items and guarantees
that not more than 10 items will be defective. What is the probability that
the carton will fail to meet the guaranteed quality?
Solution:
In this example p = 0.05, n = 100. Therefore, m = n. p = 100
(0.05) = 5

Prob. [That the carton will fail to meet the guaranteed quality] = 1- Prob.
[The carton will meet the guaranteed quality] = Prob. [Not more than 10
items will be defective] = 1 - P [r ≤ 10]
= 1- [P(0) + P(1) + P(2) + P(3)+………….+ P(10)]

In case of Poisson distribution

Therefore, we have

P(r > 10) = 1- P(r ≤ 10) = 1 -

=
Examples of Poisson Distribution
 The hourly number of customers arriving at a bank
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  The daily number of accidents on a particular stretch of highway probability distribution

 The hourly number of accesses to a particular web server NOTES

 The daily number of emergency calls in Dallas

 The number of typos in a book

 The monthly number of employees who had an absence in a large

company

 Monthly demands for a particular product

Properties of Poisson Distribution

i) Mean of the Poisson distribution is m

ii) Variance of the Poisson distribution is

where,

=m
Hence, for Poisson distribution with parameter m mean is equal to
variance.
iii) Third and fourth central moments μ3 and μ4

iv) Pearson’s constants β1 & β2 as well as γ1 and γ2 are given by

It may be noted that the first three central moments of the Poisson
distribution are identical and are equal to the value of parameter itself
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 probability distribution namely ‘m’. Hence Poisson distribution is always a positively skewed
distribution as m>0 as well as leptokurtic. As the value of m
NOTES
increases γ1 decreases and the thus Skewness is reduced for increasing
values of m. As m⟶∞, γ1 and γ2 tend to zero. So we conclude that as
m⟶∞, the curve of the Poisson distribution tends to be symmetrical
curve for large values of m.
v) Mode of Poisson distribution is determined by the value m. If m is an
integer then the distribution is bi-modal, the two modal values being
X=m and X=m-1.When m is not an integer then the distribution has
unique modal value being integral part of m.
vi) Additive property: If X1 and X2 are two independent
Poisson variate with parameters m1and m2 then their sum X1 + X2 is also
a Poisson variate with parameter m1 + m2.
Example
The mean of the Poisson distribution is 2.25. Find the other
constants of the distribution.
Solution:
We have

This curve is positively Skewed and Leptokurtic.

CHECK YOUR PROGRESS - 1
1. List the types of random variable
2. What are the properties of Binominal distribution?

3. List out few example of Poisson distribution

4.6 NORMAL DISTRIBUTION

Normal distribution is one of the important distribution in
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continuous probability distribution. Normal distribution is probably the probability distribution
most important and widely used theoretical distribution. Normal
NOTES
distribution unlike the Binomial and Poisson is a continuous probability
distribution. It has been observed that a vast number of variables arising
in studies of agricultural and dairying, social, psychological and
economic phenomena tend to follow normal distribution. The normal
distribution was first discovered by French Mathematician Abraham De-
Moivre in 1733, who obtained this continuous distribution as a limiting
case of the Binomial distribution. But it was later rediscovered and
applied by Laplace and Karl Gauss. It is also known as Gaussian
distribution after the name of Karl Friedrich Gauss.
A continuous random variable X is said to have a normal distribution
with parameters μ (mean) and σ (standard deviation), if its density
function is given by the probability law

where π and e are given by π = 22/7 and e=2.7183 (base of natural

logarithms).

Properties of normal distribution:

1) A random variable X with mean μ and variance σ 2 following the

normal law given above is represented as X~N(μ, σ 2).

2) If X~N(μ, σ 2) , then , Z is defined as a standard normal

variate with E(Z)=0 and Var (Z)=1and we write Z~N(0, 1)
3) The p.d.f. of a standard normal variate Z is given by

4) Normal distribution is a limiting form of the binomial distribution

when
a) n, the number of trials is indefinite large, i.e. n→∞ and
b) neither p nor q is very small.
5) Normal distribution is a limiting form of Poisson distribution when
its mean m is large and n is also large.

Characteristics of Normal Distribution

It has the following properties:
1. The graph of f(x) is bell shaped unimodal and symmetric curve as Self-Instructional Material
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 probability distribution shown in the Fig. 12.1. The top of the bell is directly above the
mean (μ).
NOTES

Normal probability curve

2. The curve is symmetrical about the line X = μ, (Z = 0) i.e., it has
the same shape on either side of the line X = μ, (or Z = 0). This is
because the equation of the curve ∅(z) remains unchanged if we
change z to -z.
3. Since the distribution is symmetrical, mean, median and mode
coincide. Thus, Mean = Median = Mode = μ
4. Since Mean = Median = Mode = μ, the ordinate at X = μ, (Z = 0)
divides the whole area into two equal parts. Further, since total
area under normal probability curve is 1, the area to the right of
the ordinate as well as to the left of the ordinate at X = μ (or Z =
0) is 0.5
5. Also, by virtue of symmetry the quartiles are equidistant from
median (μ), i.e,

6. Since the distribution is symmetrical, all moments of odd order

about the mean are zero. Thus μ2n+1 = 0; (n = 0,1,2,………)
i.e. μ1 = μ3 = μ5 = --- = 0.
7. The moments (about mean) of even order are given by

Putting n=1 and 2 we get

μ2 = σ2 and μ4 = 3σ4

and

8. Since the distribution is symmetrical, the moment coefficient of

skewness based on moments is given by
9. The coefficient of kurtosis is given by
10. No portion of the curve lies below the x-axis, since f(x) being the
probability can neverbe negative.
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11. Theoretically, the range of the distribution is from -∞ < to < ∞. probability distribution
But practically, range = 6σ
NOTES
12. As x increases numerically [i.e. on either side of X = μ], the value
of f(x) decreases rapidly, the maximum probability occurring at X
= μ and is given by

Thus maximum value of f(x) is inversely proportional to the

standard deviation. For large values of σ, f(x) increases, i.e., the
curve has a normal peak.
13. Distribution is unimodal with the only mode occurring at X =
μ.
14. X-axis is an asymptote to the curve i.e., for numerically large
value of X (on either side of the line (X = μ)), the curve becomes
parallel to the X-axis and is supposed to meet it at infinity.
15. A linear combination of independent normal variates is also a
normal variate. If X1,X2, ….,Xn are independent normal variates
with mean μ1,μ2, ….,μn and standard deviations σ1, σ2, …. ,
σn respectively then their linear combination

Where a1, a2, ….. , an are constants, is also a normal variate with
Mean = a1μ1+ a2μ2 +…. + an μn and Variance = a1 2 σ12 + a22 σ22 +
…….. + an2 σn2. In particular, if we take a1 = a2 =……. = an =1
then we get X1+X2 +…….. +Xn is a normal variate with mean
μ1+μ2+ ……..+μn and variance σ12 + σ22 +….. + σn2 .Thus, the
sum of independent normal variates is also a normal variate with
mean equal to sum of their means and standard deviation equal to
square root of sum of the squares of their standard deviations.
This is known as the Re-productive or Additive Property of the
Normal distribution.
16. Mean Deviation (M.D.) about mean or median or mode is given
by

17. Quartiles are given (in terms of μ and σ) by

18. Quartile deviation (Q.D.) is given by

Also

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 probability distribution 19. We have (approximately):
NOTES

From property 18 we also have

20. Points of inflexion of the normal curve are at X = μ ± σ i.e. they
are equidistant from mean at a distance of σ and are given by :

,
21. Area property: One of the most fundamental property of the
normal probability curve is the area property. If X ∽ N (μ, σ2),
then the probability that random value of X will lie between X= μ
and X= x1 is given

∴ P (0< x <x1)=P(0<z<z1)

Where , is the probability function of standard normal

variate. The definite integral , is known as Normal
Probability integral and gives the area under standard normal curve
between the ordinate z=0 and z = z1. These areas have been provided in
the form of table for different values of z1 at the intervals of 0.01 which
are available in any standard text books of statistics.
Particular Cases:
1. In particular, the probability that a random variable X lies in the
interval (μ-σ, μ+σ) is given by

The area under the normal probability curve between the ordinates at
X= μ-σ and X= μ+σ is 0.6826.In other words, the range X = μ-σ covers
68.26% of the observations (as shown in Fig). This is known as 1σ limit
of normal distribution
This is known as 1σ limit of normal distribution

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 probability distribution

NOTES

1σ, 2σ and 3σ under Normal Probability Curve

2. The probability that random variable X lies in the interval (μ-2σ,

μ+2σ) is given by

The area under the normal probability curve between the ordinates at
X= μ-2σ and X= μ+2σ is 0.95445. In other words, the range X = μ+2σ
covers 95.445% of the observations (as shown in Fig.). This is known as
2σ limits of normal distribution and is considered as warning limit in
case of statistical quality control which implies that it is a warning to the
manufacturer that the manufacturing process is going out of control.
3. The probability that random variable X lies in the interval (μ−3σ,
μ+3σ) is given by

The area under the normal probability curve between the ordinates at
X=μ−3σ and X= μ+3σ is 0.9973.In other words, the range X = μ+2σ
covers 99.73% of the observations (as shown in Fig. ). This is known as
3σ limits of normal distribution and it implies the manufacturing process
is out of control in case of statistical quality control.
Thus, the probability that a normal variate X lies outside the range μ- 3σ
is given as

Thus, in all probability, we should expect a normal variate to lie within

the range μ- 3σ though theoretically may range from −∞ to ∞.
Example Self-Instructional Material
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 probability distribution An Intelligence test was administrated to 1000 students. The
average score of students was 42 with standard deviation of 24. Find
NOTES
(a) Number of students exceeding a score of 50
(b) Number of students scoring between 30 & 58
(c) Value of score exceeded by top 100 students.
Solution:
In this problem μ =42 and σ = 24 and let X denote the score obtained
(a) Number of students exceeding score 50

As shown in figure we want to find

P(X>50) i.e. probability of shaded portion

At X=50,

P(X>50) =P(Z > 0.334) = 0.5 - P(0≤ Z ≤ 0.334)= 0.5 - 0.1308= 0.3692
No of students = 1000 * 0.3692= 369.2 ~ 369 students
(b) Number of students scoring between 30 and 58
As shown in figure we want to find
P(30<X<58) i.e. probability of shaded portion

P( Z1> -0.5) = P(0≤Z1 ≤ 0.5)= 0.1915

P(Z2<0.6667)= P(0 ≤ Z2 ≤ 0.6667)=0.2476

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 P(30<X<58)=P(-0.5≤ Z≤0.6667) =0.1915+0.2476= 0.4391 probability distribution
No of students = 1000 * .4391 = 439.1 ~ 439 students NOTES

(c) Value of score exceeded by top 100 students.

Let x1 be the value of score exceeded by top 100 students, the
probability of top 100 students = 100/N = 100/1000 = 0.1 such
that P(X>x1) = 0.1

At X= x1 , = Z1 .
From Fig the P(X>x1) shown as shaded region

P(X>x1) = P(Z>Z1) =0.1 ⇒P(0 ≤ Z ≤ Z1) = 0.4 = 1.286

x1= 72.86 ~73

Conclusion
(a) 369 students scored more than 50.
(b) 439 students scored between 30 & 58.
(c) Minimum score of top 100 students is 73.

4.7 SUMMARY
 Conditions for the binomial probability distribution are
i. The trials are independent
ii. The number of trials is finite

iii. Each trial has only two possible outcomes called

success and failure.
iv. The probability of success in each trial is a constant.

 The parameters of the binomial distributions are n and p

 The mean of the binomial distribution is np and variance are npq

 Poisson distribution as limiting form of binomial distribution

when n is large, p is small and npis finite.

 The Poisson probability distribution is x = 0,1,2,3… Where λ =

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 probability distribution np
NOTES  The mean and variance of the Poisson distribution is λ.

 The λ is the only parameter of Poisson distribution.

 Poisson distribution can never be symmetrical.

 It is a distribution for rare events.

 Normal distribution is the limiting form of binomial distribution

when n is large and neither p nor q is small

4.8 KEY WORDS

Random Variables, Binomial Distibution, Poisson Distirbution, Normal
Distribution
4.9 ANSWER TO CHECK YOUR PROGRESS
1. Discrete random variable, continuous random variable,
2. Mean = np, SD = 𝒏𝒑𝒒 , variance = npq

3. Examples
o The hourly number of customers arriving at a bank
o The daily number of accidents on a particular stretch of
highway
o The hourly number of accesses to a particular web server
o The daily number of emergency calls in 108
o The number of types in a book

o The monthly number of employees who had an absence in

a large company

4.10 QUESTIONS AND EXERCIS

SHORT ANSWER QUESTIONS:
1. Define Binomial distribution
2. Mention the properties of Normal distribution
3. What are the main characteristics of Poisson distribution
4. Determine the binomial distribution for which the mean is 4 and
variance 3. Also find P(X = 15)

LONG ANSWER QUESTIONS

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94
 variable? probability distribution

2. Define Binomial distribution? what are the main characteristics of NOTES

binomial distribution
3. Write the main characteristics of normal distribution
4. Fit the Poisson distribution to the following

X 0 1 2 3 4 5

f 120 82 52 22 4 0

4.11 FURTHER READINGS

1. Statistics (Theory & Practice) by Dr. B.N. Gupta. SahityaBhawan
Publishers and Distributors (P) Ltd., Agra.
2. Statistics for Management by G.C. Beri. Tata McGraw Hills
Publishing Company Ltd., New Delhi.
3. Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw Hill Publishing Company Ltd., New Delhi.
4. Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd., NewDelhi.
5. Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons., New Delhi.
6. Statistical Method by S.P. Gupta. Sultan Chand and Sons., New
Delhi.
7. Statistics for Management by Richard I. Levin and David S.
Rubin. Prentice Hall of India Pvt. Ltd., New Delhi.

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 UNIT – V ESTIMATION
Estimation

NOTES
Structure
5.1. Introduction
5.2 Reasons For Making Estimates
5.3 Types Of Estimates
5.4 Point Estimation
5.5 Interval Estimation
5.6 Criteria of a Good Estimator
5.7 Unbiasedness
5.8 Consistency
5.9 Efficiency
5.10 Sufficiency
5.11 Confidence Intervals
512 Determining The Sample Size In Estimation
5.1. INTRODUCTION
The sampling process is used to draw statistical inference about the
characteristics of a population or process of interest. On many
occasions we do not have enough information to calculate an
exact value of population parameters (such as μ, σ and p)
and therefore make the best estimate of this value from the
corresponding sample statistics (such as x , s, and P ). The need to
use the sample statistic to draw conclusions about the population
characteristic is one of the fundamental applications of statistical
inference in business and economics.
5.2 Reasons for Making Estimates
A few applications of statistical estimation are given below :
A production manager needs to determine the proportion of items being
manufactured that do not match with quality standards.
A mobile phone service company may be interested to know the average
length of a long distance telephone call and its standard
deviation
A bank needs to understand consumer awareness of its services and credit
schemes.

Any service centre needs to determine the average amount of time a

customer spends in queue.

In all such cases, a decision-maker needs to examine the following two

concepts that are useful for drawing statistical inference about an unknown
population or process parameters based upon random samples:

Estimation– a sample statistic to estimate an unknown parameter value

Hypothesis testing– a claim or belief about an unknown parameter value.

In this lesson we shall discuss methods to estimate unknown population
parameter and then to determine the range of values (confidence interval)
likely to contain the parameter value.
5.3 TYPES OF ESTIMATES
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Let us first know the concept of ‘estimate’ as used in Statistics. Estimation
According to some dictionaries, an estimate is a valuation based on
NOTES
opinion or roughly made from imperfect or incomplete data. This
definition may apply, for example, when an individual who has an
opinion about the competence of one of his colleagues. But, in Statistics
the term estimate is not used in this sense. In Statistics too the estimates
are made when the information available is incomplete or imperfect.
However, such estimates are made only when they are based on sound
judgement or experience and when the samples are scientifically selected.

There are two types of estimates that we can make about a population : a
point estimate and an interval estimate. A point estimate is a single
number, which is used to estimate an unknown population parameter.
Although a point estimate may be the most common way of expressing an
estimate, it suffers from a major limitation since it fails to indicate how
close it is to the quantity it is supposed to estimate. In other words, a point
estimate does not give any idea about the reliability of precision of the
method of estimation used. For instance, if someone claims that 40
percent of all children in a certain town do not go to the school and are
devoid of education, it would not be very helpful if this claim is based on
a small number of households, say, 20. However, as the number of
households interviewed for this purpose increases from 20 to 100, 500 or
even 5,000, the claim that 40 percent of children have no school
education would become more and more meaningful and reliable. This
makes it clear that a point estimate should always be accompanied by
some relevant information so that it is possible to judge how far it is
reliable.
The second type of estimate is known as the interval estimate. It is a range
of values used to estimate an unknown population parameter. In case of
an interval estimate, the error is indicated in two ways: first by the extent
of its range; and second, by the probability of the true population
parameter lying within that range. Taking our previous example of 40
percent children not having a school education, the statistician may say
that actual percentage of such children in that town may lie between 35
percent and 45 percent. Thus, he will have a better idea of the reliability
of such an estimate as compared to the point estimate of 40 percent.
Estimator and Estimate
When we make an estimate of a population parameter, we use a sample
statistic. This sample statistic is an estimator.
∑ xi

For example, the samples mean x = i =1

is a point estimator of the population mean μ. The value obtained by the

estimator is known as an estimate. Many different Statistics can be used to
estimate the same parameter. For example, we may use the sample mean or
the sample median or even the range to estimate the population mean. The Self-Instructional Material

97
 Estimation question here is: how can we evaluate the properties of these estimates,
NOTES compare then with one another, and finally, decide which the ‘best’ is? The
answer to this question is possible only when we have certain criteria that a
good estimator must satisfy. These criteria are briefly discussed below.

5.4 POINT ESTIMATION

In point estimation, a single sample statistic (such as x , s, and p ) is
calculated from the sample to provide a best estimate of the true value of
the corresponding population parameter (such as μ, σ and p ). Such a
single relevant statistic is termed as point estimator, and the

value of the statistic is termed as point estimate. For example, we may

calculate that 10 per cent of the items in a random sample taken from a
day’s production are defective. The result ‘10 per cent’ is a point estimate
of the percentage of items in the whole lot that are defective. Thus, until
the next sample of items is not drawn and examined, we may proceed on
manufacturing on the assumption that any day’s production contains 10
per cent defective items.

5.5 INTERVAL ESTIMATION

Generally, a point estimate does not provide information about ‘how close
is the estimate’ to the population parameter unless accompanied by a
statement of possible sampling errors involved based on the sampling
distribution of the statistic. It is therefore important to know the precision
of an estimate before relying on it to make a decision. Thus, decision -
makers prefer to use an interval estimate that is likely to contain the
population parameter value. However, it is also important to state ‘how
confident’ he is that the interval estimate actually contains the parameter
value. Hence an interval estimate of a population parameter is therefore a
confidence interval with a statement of confidence that the interval
contains the parameter value.

5.6 CRITERIA OF A GOOD ESTIMATOR

There are four criteria by which we can evaluate the quality of a statistic as
an estimator.
These are: unbiasedness, efficiency, consistency and sufficiency.

5.7 Unbiasedness
This is a very important property that an estimator should possess. If we
take all possible samples of the same size from a population and calculate
their means, the mean μ x of all these means will be equal to the mean μ of
the population. This means that the sample mean is an unbiased estimator
of the population mean μ. When the expected value (or mean) of a sample
statistic is equal to the value of the corresponding population parameter,
the sample statistic is said to be an unbiased estimator.
Suppose we take the smallest sample observation as an estimator of the
population mean μ, it can be easily shown that this estimator is biased.
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Since the smallest observation must be less than the mean, its expected
value must be less than μ. Symbolically, E(Xs) < μ, where Xs stands for
98
the smallest item and E stands for the expected value. Thus, this estimator Estimation
is biased downwards. The extent of bias is the difference between the
NOTES
expected value of the estimator and the value of the parameter. In this case,
bias is equal to E(Xs)- μ. In contrast, the biases for the sample mean x is
zero.

5.8 Consistency
Another important characteristic that an estimator should possess is
consistency. Let us take the case of the standard deviation of the
sampling distribution of x . The standard deviation of the sampling
distribution of sample mean is computed by following formula :
σ
σx =

The formula states that the standard deviation of the sampling

distribution of x decreases as the sample size increases and vice versa.
When the sample size n increases, the population standard deviation σ is
to be divided by a higher denominator. This results in the reduced value
of sample standard deviation σξ. Let us take an example.

Illustration 13.1: A company has 4,000 employees whose

average monthly wage comes to Rs.4,800 with a standard
deviation of Rs.1,200. Let x be the mean monthly wage
for a random sample of certain employees selected from
this company. Find the mean and standard deviation of ξ
for a sample size of (a) 81, (b) 100 and (c) 180.

Solution
From the given information, for the population of all employees, N = 4,000
μ = Rs.4,800 σ = Rs.1,200.

The mean μξ of the sampling distribution of the ξ is μξ = μ = Rs.4,800.

As n = 81 and N = 4,000, which gives n/N = 0.01. At this value is less

than 0.05, the standard deviation of ξ is obtained by using the formula.
Substituting the values.

σ 1,200 1,200
x = n or, σx = 81 = 9 = Rs.133.33
In this case, n = 100 and n/N = 100/4,000 = 0.025, which is also less
than 0.05. The mean and the standard deviation ξ are

μξ = μ = Rs.4,800

σ 1,200 1,200
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 Estimation In this case, n = 180 and n/N = 180/4,000 = 0.045, which again is less
NOTES
than 0.05. The mean and the standard deviation ξ are

μx = μ = Rs.4,800
σ 1,200 1,200
x = n or, σ x = 180 = 13. 42 = Rs.89.42

From the above three sets of calculation, it becomes clear that the mean
of the sampling distribution of x is always equal to the mean of the
population regardless of the sample size. But, in case of the standard
deviation, we find the change. In the given example, we find that
standard deviation of x decreased from Rs.189.87 to Rs.120 and then to
Rs.133.33 as the sample size increased from 40 to 100 and then to 180.

5.9 Efficiency
Another desirable property of a good estimator is that it should be
efficient. Efficiency is measured in terms of size of the standard error of
the statistic. Since an estimator is a random variable, it is necessarily
characterised by a certain amount of variability. This means that some
estimates may be more variable than others. Just as bias is related to the
expected value of the estimator, so efficiency can be defined in terms of
the variance. In large samples, for example, the variance of the sample
2
mean is V( x )=σ /n. As the sample size n increases, the variance of the
sample mean (V x ) becomes smaller, so the estimator becomes more
efficient. This criterion, when applied to large samples, gives better
estimates as compared to the small ones.
The efficiency of one estimator in relation to another estimator can be
judged by comparing their sampling variances. Thus, efficiency relates to
the size of the standard error. Given the same sample size, the statistic that
has a smaller standard error is preferable as it is efficient in relation to
another statistic that has a larger standard error. The sampling distribution
of the mean and the median have the same mean, that is, the population
mean. However, the variance of the sampling distribution of the means is
smaller than the variance of the sampling distribution of the medians. As
such, the sample mean is an efficient estimator of the population mean,
while the sample median is an inefficient estimator.
5.10 Sufficiency
The fourth property of a good estimator is that it should be sufficient. A
sufficient statistic utilises all the information a sample contains about the
parameter to be estimated. ξ, for example, is a sufficient estimator of the
population mean μ. It implies that no other estimator of μ, such as the
sample median, can provide any additional information about the
parameter μ. Likewise, we can say that the sample proportion π.
Having looked into properties of a good estimator briefly, a pertinent
question arises: how can we find estimators with these desirable
properties? This brings us to the method of maximum likelihood
5.6.2 METHOD OF MAXIMUM LIKELIHOOD (ML)
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The maximum likelihood method provides estimators with the desirable Estimation
properties such as efficiency, consistency and sufficiency, which we
NOTES
have just discussed. It usually does not give an unbiased estimate. Let
us take an example to explain this method.

Example: Suppose we want to estimate the average grade μ of a

large number of students. A random sample of size n = 64 is taken
and the sample mean x is found to be 90 marks. Now, the
assumption on which we have to base our reasoning is that the
random sample of n = 64 is representative of the population. We
saw how samples that were similar to the population had greater
probability of being selected.

Let us now reverse this reasoning as follows: we have before us a random

sample size n = 64 and x = 90 marks. From which population did it most
probably come-a population with μ = 85, 90 or 95? According to our
earlier approach, we would think that it most probably came from a
population with μ =90 marks. Thus, it can be concluded that the
population mean μ, based on our sample, is most likely to be μ=90 marks.

A point worth noting is that the population mean μ is either 90 or not; it

has only one value.

Hence, we have used the term likely instead of probably.

This technique to find the estimators was first used and developed by Sir
R.A. Fisher in 1922, who called it the maximum likelihood method

5.11 Confidence Intervals

There are two types of estimates for each population parameter: the point
estimate and confidence interval (CI) estimate. For both continuous
variables (e.g., population mean) and dichotomous variables (e.g.,
population proportion) one first computes the point estimate from a
sample. Recall that sample means and sample proportions are unbiased
estimates of the corresponding population parameters.

For both continuous and dichotomous variables, the confidence interval

estimate (CI) is a range of likely values for the population parameter based
on:

the point estimate, e.g., the sample mean

the investigator's desired level of confidence (most commonly 95%, but
any level between 0-100% can be selected)
and the sampling variability or the standard error of the point estimate.
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 Estimation Strictly speaking a 95% confidence interval means that if we were to take
NOTES
100 different samples and compute a 95% confidence interval for each
sample, then approximately 95 of the 100 confidence intervals will contain
the true mean value (μ). In practice, however, we select one random
sample and generate one confidence interval, which may or may not
contain the true mean. The observed interval may over- or underestimate μ.
Consequently, the 95% CI is the likely range of the true, unknown
parameter. The confidence interval does not reflect the variability in the
unknown parameter. Rather, it reflects the amount of random error in the
sample and provides a range of values that are likely to include the
unknown parameter. Another way of thinking about a confidence interval
is that it is the range of likely values of the parameter (defined as the point
estimate + margin of error) with a specified level of confidence (which is
similar to a probability).

Suppose we want to generate a 95% confidence interval estimate for an

unknown population mean. This means that there is a 95% probability that
the confidence interval will contain the true population mean. Thus, P(
[sample mean] - margin of error < μ < [sample mean] + margin of error) =
0.95.

The Central Limit Theorem introduced in the module on Probability stated

that, for large samples, the distribution of the sample means is
approximately normally distributed with a mean:and a standard deviation
(also called the standard error):

For the standard normal distribution, P(-1.96 < Z < 1.96) = 0.95, i.e., there
is a 95% probability that a standard normal variable, Z, will fall between -
1.96 and 1.96. The Central Limit Theorem states that for large samples:

By substituting the expression on the right side of the equation:

Using algebra, we can rework this inequality such that the mean (μ) is the
middle term, as shown below .then and finally

This last expression, then, provides the 95% confidence interval for the
population mean, and this can also be expressed as:

Thus, the margin of error is 1.96 times the standard error (the standard
deviation of the point estimate from the sample), and 1.96 reflects the fact
that a 95% confidence level was selected. So, the general form of a
confidence interval is:

point estimate + Z SE (point estimate)

where Z is the value from the standard normal distribution for the selected
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In practice, we often do not know the value of the population standard Estimation
deviation (σ). However, if the sample size is large (n > 30), then the sample
NOTES
standard deviations can be used to estimate the population standard
deviation.

512 Determining the Sample Size in Estimation

Sample size determination is the act of choosing the number of

observations or replicates to include in a statistical sample. The sample size
is an important feature of any empirical study in which the goal is to make
inferences about a population from a sample. In practice, the sample size
used in a study is usually determined based on the cost, time, or
convenience of collecting the data, and the need for it to offer sufficient
statistical power. In complicated studies there may be several different
sample sizes: for example, in a stratified survey there would be different
sizes for each stratum. In a census, data is sought for an entire population,
hence the intended sample size is equal to the population. In experimental
design, where a study may be divided into different treatment groups, there
may be different sample sizes for each group.

Sample sizes may be chosen in several ways:

using experience – small samples, though sometimes unavoidable, can

result in wide confidence intervals and risk of errors in statistical
hypothesis testing.
using a target variance for an estimate to be derived from the sample
eventually obtained, i.e. if a high precision is required (narrow confidence
interval) this translates to a low target variance of the estimator.
using a target for the power of a statistical test to be applied once the
sample is collected.
using a confidence level, i.e. the larger the required confidence level, the
larger the sample size (given a constant precision requirement).

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 Test of Hypothesis

NOTES
UNIT - VI TEST OF HYPOTHESIS
Structure
6.0 Introduction
6.1 Objectives
6.2 Hypothesis Testing on Population Mean
6.2.1 Population is Known
6.2.2 Population is Unknown
6.3 Difference Between Mean of Two Populations
6.3.1 Population Variance Known
6.3.2 Population Variance Unknown
6.4 Test of Hypothesis for Population Proportion
6.5 Difference Between Two Proportion
6.6 Summary
6.7 Key Words
6.8 Answers to Check Your Progress
6.9 Questions and Exercise
6.10 Further Readings

6.0 INTRODUCTION
Hypothesis testing was introduced by Ronald Fisher, Jerzy
Neyman, Karl Pearson and Pearson’s son, Egon Pearson. Hypothesis
testing is a statistical method that is used in making statistical decisions
using experimental data. Hypothesis Testing is basically an assumption
that we make about the population parameter.

6.1 OBJECTIVES

 Understand purpose of Hypothesis testing;

 Understand the procedure for tests of hypotheses based on large
samples
 Solve the problems of testing hypotheses concerning mean(s) and
proportion(s) based on large samples

6.2 HYPOTHESIS TESTING ON POPULATION MEAN

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Two situations may arise out of this, first one is when the population Test of Hypothesis

variance is known and the second situation is if the population variance is NOTES
unknown.
6.2.1 POPULATION VARIANCE KNOWN

Steps:

1. Let μ and σ2 be respectively the mean and the variance of the

population under study, where σ2 is known. If μ0 is an admissible
value of μ, then frame the null hypothesis as H0: μ = μ0and
choose the suitable alternative hypothesis from

a. (i) H1: μ ≠ μ0 (ii) H1: μ > μ0 (iii) H1: μ < μ0

2. Let (X1, X2, …,Xn) be a random sample of n observations drawn

from the population, where nis large (n ≥ 30).

3. Let the level of significance be α.

𝑿− 𝝁
4. Consider the test statistics Z= . underH0. Here 𝑿represents
𝛔/√𝐧

the sample mean, The approximate sampling distribution of the

test statistics under H0is the N(0,1) distribution

5. Calculate the value of Z for the given sample (x1, x2, ..., xn) as

𝑿− 𝝁
Z= 𝛔/√𝐧.

6. Find the critical value, ze, corresponding to α and H1 from the

following table

Alternative Hypothesis (H1) μ ≠ μ0 μ > μ0 μ < μ0

Critical Value (ze) zα/2 zα –zα

7. Decide on H0 choosing the suitable rejection rule from the

following table corresponding to H1.

Alternative Hypothesis (H1) μ ≠ μ0 μ > μ0 μ < μ0

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Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

105
 Test of Hypothesis

NOTES
Example:

A company producing batteries finds that mean life span of the

population of its batteries is 200 hours with a standard derivation of 15
hours. A sample of 100 batteries randomly chosen is found to have the
mean life span of 195 hours. Test, at 5% level of significance, whether
the mean life span of the batteries is significantly different from 200
hours.
Solution:
Step 1 :Let μ and σ represent respectively the mean and standard
deviation of the probability distribution of the life span
of the batteries. It is given that σ = 15 hours. The null
and alternative hypotheses are
Null hypothesis: H0: μ = 200
i.e., the mean life span of the batteries is not
significantly different from 200 hours.
Alternative hypothesis: H1 : μ ≠ 200
i.e., the mean life span of the batteries is significantly
different from 200 hours.
It is a two-sided alternative hypothesis.
Step 2 : Data
The given sample information are
Sample size (n) = 100, Sample mean (x) = 195 hours
Step 3 : Level of significance
α = 5%
Step 4 : Test statistic
The test statistic is , under H0
Under the null hypothesis H0, Z follows the N(0,1)
distribution.
Step 5 : Calculation of Test Statistic
The value of Z under H0 is calculated from
𝑿− 𝝁 𝟏𝟗𝟓−𝟐𝟎𝟎
Z= 𝛔/√𝐧. = . = -3.33
𝟏𝟓/√𝟏𝟎𝟎

Thus; | z 0 | = 3.33
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 Step 6 : Critical value Test of Hypothesis

Since H1 is a two-sided alternative, the critical value at NOTES

α = 0.05 is ze= z0.025 = 1.96.
Step 7 : Decision
Since H1is a two-sided alternative, elements of the
critical region are determined by the rejection rule |z0| ≥
ze. Thus, it is a two-tailed test. For the given sample
information, the rejection rule holds i.e., |z0| = 3.33
>ze= 1.96. Hence, H0 is rejected in favour of H1: μ ≠
200. Thus, the mean life span of the batteries is
significantly different from 200 hours.

6.2.2 POPULATION VARIANCE UNKNOWN

Steps:

1. Let μ and σ2be respectively the mean and the variance of the
population under study, where σ2 is unknown. If μ0 is an
admissible value of μ, then frame the null hypothesis as H0: μ =
μ0and choose the suitable alternative hypothesis from
(i) H1: μ ≠ μ0(ii) H1: μ > μ0(iii) H1: μ < μ0
2. Let (X1, X2, …,Xn) be a random sample of n observations
drawn from the population, where n is large (n ≥ 30).
3. Specify the level of significance, α.
𝑿− 𝝁
4. Consider the test statistic Z= under H0, where X and S are
𝐒/√𝐧
the sample mean and sample standard deviation respectively. It
may be noted that the above test statistic is obtained from Z by
substituting S for σ.
The approximate sampling distribution of the test statistic under
H0is the N(0,1)distribution.

5. Calculate the value of Z for the given sample (x1, x2, ...,xn) as
𝑿− 𝝁
Z= . Here,𝑿 and s are respectively the values of 𝑿and S
𝐒/√𝐧
calculated for the given sample.
6. Find the critical value, ze, corresponding to α and H1from the
following table

Alternative Hypothesis (H1) μ ≠ μ0 μ > μ0 μ < μ0

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107
 Test of Hypothesis
Critical Value (ze) zα/2 zα –zα
NOTES
7. Decide on H0 choosing the suitable rejection rule from the
following table corresponding to H1.

Alternative Hypothesis (H1) μ ≠ μ0 μ > μ0 μ < μ0

Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

Example:

A car manufacturing company desires to introduce a new model

car . The company claims that the mean fuel consumption of its new
model car is lower than that of the existing model of the car, which is 57
kms/litre. A sample of 100 cars of the new model car is selected
randomly and their fuel consumptions are observed. It is found that the
mean fuel consumption of the 100 new model car is 60 kms/litre with a
standard deviation of 3 kms/litre. Test the claim of the company at 5%
level of significance.

Solution:
Step 1 :Let the fuel consumption of the new model car be assumed to
be distributed according to a distribution with mean and
standard deviation respectively μ and σ. The null and
alternative hypotheses are
Null hypothesis H0: μ = 57
i.e., the average fuel consumption of the company’s new
model car is not significantly different from that of the
existing model.
Alternative hypothesis H1: μ > 57
i.e., the average fuel consumption of the company’s new
model car is significantly lower than that of the existing
model. In other words, the number of kms by the new model
csr is significantly more than that of the existing model car.
Step 2 : Data:
The given sample information are
Size of the sample (n) = 100. Hence, it is a large sample.
Sample mean (𝒙 )= 30
Sample standard deviation(s) = 3

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 Step 3 : Level of significance Test of Hypothesis

α = 5% NOTES

Step 4 : Test statistic

The test statistic under H0 is
𝑿− 𝝁
. Z= 𝐒/√𝐧

Since n is large, the sampling distribution of Z under H0 is

the N(0,1) distribution.

Step 5 : Calculation of Test Statistic

The value of Z for the given sample information is
calculated from
𝑿− 𝝁 𝟔𝟎−𝟓𝟕
Z0 = 𝐒/√𝐧 = = 10
𝟑/√𝟏𝟎𝟎

Step 6 : Critical Value

Since H1 is a one-sided (right) alternative hypothesis, the
critical value at α = 0.05 is ze= z0.05 = 1.645.
Step 7 : Decision
Since H1 is a one-sided (right) alternative, elements of the
critical region are defined by the rejection rule z0 >ze= z0.05.
Thus, it is a right-tailed test. Since, for the given sample
information, z0 = 10 >ze= 1.645, H0 is rejected.

6.3 DIFFERENCE BETWEEN MEANS OF TWO

POPULATIONS
6.3.1 POPULATION VARIANCE KNOWN
Steps:
1. Let μxand 𝜎²x be respectively the mean and the variance of
Population -1. Also, let μYand 𝜎²ybe respectively the mean and
the variance of Population -2 under study. Here 𝜎²x and𝜎²y are
known admissible values.

Frame the null hypothesis as H0: μX = μYand choose the suitable

alternative hypothesis from

a. (i) H1: μX ≠ μY(ii) H1: μX>μY(iii) H1: μX<μY

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2. Let (X1, X2, …, Xm) be a random sample of m observations

109
 Test of Hypothesis drawn from Population-1 and (Y1, Y2, …, Yn) be a random
NOTES
sample of n observations drawn from Population-2, where m and
n are large(i.e., m ≥ 30 and n ≥ 30). Further, these two samples
are assumed to be independent.

3. Specify the level of significance, α.

𝑋 −𝑌 − (μx−μY )
4. Consider the test statistic Z = 𝜎 ²x 𝜎 ²y
under H0, where 𝑋
+
𝑚 𝑛
and 𝑌 are respectively the means of the two samples described in
Step-2.

The approximate sampling distribution of the test statistic

𝑋 −𝑌
𝑍= 𝜎 ²x 𝜎 ²y
under H0 (i.e., μX= μY) is the N(0,1) distribution.
+
𝑚 𝑛

It may be noted that the test statistic, when 𝜎²x = 𝜎²y =

𝑋 −𝑌
𝜎², is 𝑍 = 1 1
+
𝑚 𝑛

5. Calculate the value of Z for the given samples (x1, x2, ...,xm) and
𝑋 −𝑌
(y1, y2, …, yn) as Z0 = 𝜎 ²x 𝜎 ²y
.
+
𝑚 𝑛

Here, 𝑥 and 𝑦are respectively the values of 𝑋 and 𝑌for the given
samples.
6. Find the critical value, ze, corresponding to α and H1 from the
following table

Alternative Hypothesis (H1) μX≠ μY μX>μY μX<μY

Critical Value (ze) zα/2 zα –zα

7. Make decision on H0 choosing the suitable rejection rule from the

following table corresponding to H1.

Alternative Hypothesis (H1) μX≠ μY μX>μY μX<μY

Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

Example:
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110
 Performance of students in a national level Olympiad exam was Test of Hypothesis
studied. The scores secured by randomly selected students from two
NOTES
districts, viz., D1 and D2 of a State were analyzed. The number of students
randomly selected from D1 and D2 are respectively 1000 and 1600.
Average scores secured by the students selected from D1 and D2 are
respectively 116 and 114. Can the samples be regarded as drawn from the
identical populations having common standard deviation 27 Test at 5%
level of significance.

Solution:

Step 1 :Let μX and μY be respectively the mean scores secured in the

national level Olympiad examination by all the students from
the districts D1 and D2 considered for the study. It is given
that the populations of the scores of the students of these
districts have the common standard deviation σ = 2. The null
and alternative hypotheses are
Null hypothesis: H0: μX= μY
i.e., average scores secured by the students from the study
districts are not significantly different.
Alternative hypothesis: H1: μX ≠ μY
i.e., average scores secured by the students from the study
districts are significantly different. It is a two-sided alternative.

Step 2 : Data
The given sample information are
Size of the Sample-1 (m) = 1000
Size of the Sample-2 (n) = 1600. Hence, both the samples
are large.
Mean of Sample-1 (𝑥 ) = 116
Mean of Sample-2 (𝑦 ) = 114

Step 3 : Level of significance

α = 5%

Step 4 : Test statistic

𝑋 −𝑌
The test statistic under the null hypothesis H0 is 𝑍 = 1 1
+
𝑚 𝑛 Self-Instructional Material

111
 Test of Hypothesis Since both m and n are large, the sampling distribution of
NOTES
Z under H0 is the N(0, 1) distribution.

Step 5 : Calculation of Test Statistic

The value of Z is calculated for the given sample

information from

𝑋 −𝑌 116 −114
𝑍= 1 1
= 1 1
= 49.628
+ +
𝑚 𝑛 1000 1600

Step-6 : Critical value

Since H1is a two-sided alternative hypothesis, the critical value at
α = 0.05 is ze = z0.025 = 1.96.

Step-7 : Decision
Since H1 is a two-sided alternative, elements of the critical
region are defined by the rejection rule |z0| ≥ ze= z0.025. For
the given sample information, |z0| = 49.628 >ze= 1.96. It
indicates that the given sample contains sufficient evidence
to reject H0. Thus, it may be decided that H0 is rejected.
Therefore, the average performance of the students in the
districts D1 and D2 in the national level Olympiad
examination are significantly different. Thus the given
samples are not drawn from identical populations.

6.3.2 POPULATION VARIANCE UNKNOWN

Steps:
1. Let μx and 𝜎²x be respectively the mean and the variance of
Population -1. Also, let μY and 𝜎²y be respectively the mean and
the variance of Population -2 under study. Here 𝜎²x and𝜎²y are
known admissible values.

Frame the null hypothesis as H0: μX = μYand choose the suitable

alternative hypothesis from

i. (i) H1: μX ≠ μY(ii) H1: μX>μY(iii) H1: μX<μY

2. Let (X1, X2, …, Xm) be a random sample of m observations

drawn from Population-1 and (Y1, Y2, …, Yn) be a random
sample of n observations drawn from Population-2, where m and
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112
 n are large(i.e., m ≥ 30 and n ≥ 30). Further, these two samples Test of Hypothesis
are assumed to be independent.
NOTES

3. Specify the level of significance, α.

𝑋 −𝑌 − (μx−μY )
4. Consider the test statistic Z = under H0,
𝑆²x 𝑆²y
+
𝑚 𝑛

5. (i.e., μX= μY)

i.e, the above test stastistics is obtained from Z considered in
the test described by substituting 𝑆²x and 𝑆²y respectively for
𝜎²x and 𝜎²y

The approximate sampling distribution of the test statistic

𝑋 −𝑌
𝑍= 𝑆²x 𝑆²y
under H0 is the N(0,1) distribution.
+
𝑚 𝑛

6. Calculate the value of Z for the given samples (x1, x2, ...,xm) and
𝑋 −𝑌
(y1, y2, …, yn) as Z0 = 𝑆²x 𝑆²y
.
+
𝑚 𝑛

Here, 𝑥 and 𝑦are respectively the values of 𝑋 and 𝑌for the given
samples.
Also, 𝑠²x and 𝑠²yare respectively the values of 𝑆²x and 𝑆²y for the
given samples.
7. Find the critical value, ze, corresponding to α and H1 from the
following table

Alternative Hypothesis (H1) μX≠ μY μX>μY μX<μY

Critical Value (ze) zα/2 zα –zα

8. Make decision on H0 choosing the suitable rejection rule from the

following table corresponding to H1.

Alternative Hypothesis (H1) μX≠ μY μX>μY μX<μY

Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

6.4 TEST OF HYPOTHESES FOR POPULATION Self-Instructional Material

PROPORTION
113
 Test of Hypothesis
Steps:
NOTES
1. Let P denote the proportion of the population possessing the
qualitative characteristic (attribute) under study. If p0 is an
admissible value of P, then frame the null hypothesis as H0:P = p0
and choose the suitable alternative hypothesis from
(i) H1: P ≠ p0(ii) H1: P > p0 (iii) H1: P < p0
2. Let p be proportion of the sample observations possessing the
attribute, where n is large, np> 5 and n (1 – p) > 5.

3. Specify the level of significance, α.

𝑝 −𝑃
4. Consider the test statistic under H0. Here, 𝑃𝑄 , Here, Q = 1 – P.
𝑛
The approximate sampling distribution of the test statistic under
H0 is the N(0,1) distribution.
𝑝−𝑃
5. Calculate the value of Z under H0 for the given data as , p 0q 0
, q0
𝑛
= 1 – p0.
6. Choose the critical value, ze, corresponding to α and H1 from the
following table

Alternative Hypothesis (H1) P ≠ p0 P > p0 P < p0

Critical Value (ze) zα/2 zα –zα

7. Make decision on H0 choosing the suitable rejection rule from the

following table corresponding to H1.

Alternative Hypothesis (H1) P ≠ p0 P > p0 P < p0

Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

Example:

A survey was conducted among the students of a city to study

their preference towards consumption of chocolate and ice-cream.
Among 2000 randomly selected students, it is found that 1120 are
chocolate and the remaining are ice-cream. Can we conclude at 1% level
of significance from this information that both chocolate and ice-cream
are equally preferred among the students in the city?

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114
Solution: Test of Hypothesis

Step 1 :Let P denote the proportion of students in the city who NOTES
preferred to have chocolate. Then, the null and the
alternative hypotheses are
Null hypothesis: H0 : = 0.5
i.e., it is significant that both chocolate and ice-cream are
preferred equally in the city.
Alternative hypothesis: H0 : ≠ 0.5
i.e., preference of chocolate and ice-cream are not
significantly equal. It is a two-sided alternative hypothesis.
Step 2 : Data
The given sample information are
Sample size (n) = 2000. Hence, it is a large sample.
No. of chocolate consumer = 1120
1120
Sample proportion (p) =2000 = 0.56

Step 3 : Level of significance

α = 1%

Step 4 : Test statistic

Since n is large, np= 1120 > 5 and n(1 – p) = 880 > 5, the
𝑝−𝑃
test statistic under the null hypothesis, is Z = 𝑃𝑄
𝑛

Its sampling distribution under H0 is the N(0,1) distribution.

Step 5 : Calculation of Test Statistic
The value of Z can be calculated for the sample information
from
𝑝 −𝑃 0.56−0.50
Z= 𝑃𝑄
= 0.5 𝑥 0.5
= 5.3763
𝑛 2000

Step 6 : Critical value

Since H1 is a two-sided alternative hypothesis, the critical
value at 1% level of significance is zα/2 = z0.005 = 2.58.
Step 7 : Decision
Since H1 is a two-sided alternative, elements of the critical Self-Instructional Material
region are determined by the rejection rule |z0| ≥ ze. Thus it
115
 Test of Hypothesis is a two-tailed test. Since |z0| = 5.3763 >ze= 2.58, reject H0
NOTES
at 1% level of significance. Therefore, there is significant
evidence to conclude that the preference of chocolate and
ice-cream are different.

6.5 DIFFERENCE BETWEEN TWO PROPORTIONS

Steps:
1: Let PX and PY denote respectively the proportions of Population-1
and Population-2 possessing the qualitative characteristic
(attribute) under study. Frame the null hypothesis as H 0:
PX=PY and choose the suitable alternative hypothesis from

(i) H1: PX≠ PY (ii) H1: PX> PY (iii) H1: PX < PY

2: Let PX and PY denote respectively the proportions of the samples of

sizes m and n drawn from Population-1 and Population-2
possessing the attribute, where m and n are large (i.e., m ≥
30 and n ≥ 30). Also, mp x> 5, m( 1- px) > 5, npy> 5, n( 1-
py) > 5 . Here, these two samples are assumed to be
independent.
3: Specify the level of significance, α.
px−py − (PX− PY )
4: Consider the test statistic Z = 1 1
under H0. Here
𝑝𝑞 ( + )
𝑚 𝑛

mp x+ np y
𝑝= , 𝑞 = 1 - 𝑝 . The approximate sampling
𝑚 +𝑛
distribution of the test statistic
under H0 is N(0,1) distribution.
(PX− PY )
5: Calculate the value of Z for the given data as Z = 1 1
𝑝𝑞( + )
𝑚 𝑛

6: Choose the critical value, z e, corresponding to α and H1 from the

following table

Alternative Hypothesis (H1) PX≠ PY PX> PY PX < PY

Critical Value (ze) zα/2 zα –zα

7: Decide on H0choosing the suitable rejection rule from the following

table corresponding to H1
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 Test of Hypothesis

Alternative Hypothesis (H1) PX≠ PY PX> PY PX < PY NOTES

Rejection Rule |z0|≥ zα/2 z0 >zα z0 <–zα

Example:
A study was conducted to investigate the interest of students
in private schools. Among randomly selected 1000 students
from City-1, 800 persons were found to be private school.
From City-2 , 1600 persons were selected randomly and
among them 1200 students are from private school. Do the
data indicate that the two cities are significantly different
with respect to prevalence of private school among the
students? Choose the level of significance as α = 0.05.
Solution:
Step1 :Let PX and PY be respectively the proportions of private school
students in City-1 and City-2. Then, the null and alternative
hypotheses are
Null hypothesis: H0: PX = PY
i.e., there is no significant difference between the
proportions of private school students in City-1 and City-2.
Alternative hypothesis: H1: PX≠ PY
i.e., difference between the proportions of private school
students in City-1 and City-2 is significant. It is a two-sided
alternative hypothesis.
Step 2 : Data
The given sample information are

City Sample size Sample proportion

City 1 m = 1000 PX = 800/ 1000 = 0.80

City 2 n = 1600 PY = 1200 / 1600 = 0.75

Here m ≥ 30 and n ≥ 30, mp x = 800 > 5,

m( 1- px) = 200 > 5, npy = 1200 > 5, n( 1- py) = 400 > 5 .
Step 3 : Level of significance
α = 5% Self-Instructional Material
Step 4 : Test statistic
117
 Test of Hypothesis The test statistic under the null hypothesis is
NOTES px−py − (PX− PY ) mp x+ np y
Z= where 𝑝= ,𝑞=1-𝑝
1 1 𝑚 +𝑛
𝑝𝑞( + )
𝑚 𝑛

Step 5 : Calculation of Test Statistic

The value of Z for given sample information is calculated
from
(PX− PY ) (0.80−0.75 )
Z= 1 1
= 1 1
= 2.0764
𝑝𝑞 ( + ) 0.77 (0.23)( + )
𝑚 𝑛 1000 1600

Step 6 : Critical value

Since H1 is a two-sided alternative hypothesis, the critical
value at 5% level of significance is ze= 1.96.
Step 7 : Decision
Since H0 is a two-sided alternative, elements of the critical
region are determined by the rejection rule |z0| >ze. Thus, it
is a two-tailed test. For the given sample information,ze =
2.0764 > = 1.96. Hence, H0 is rejected. We can conclude
that the difference between the proportions of private school
students in City-1 and City-2 is significant.

CHECK YOUR PROGRESS - 1

1. What is hypothesis testing?
2. A large sample theory is applicable when
3. When is standard error of the sample proportion under H 0

6.6 SUMMARY

 If the number of sample observations is greater than or equal to

30, it is called large sample.
 For hypotheses testing based on two samples, if the sizes of both
the samples are greater than or equal to 30, they are called large
samples.
 For testing population proportion, the sampling distribution of the
test statistic is N(0, 1), only when n >30, np> 5 and n (1 - p) > 5.
 For testing equality of two population proportions, the sampling
distribution of the test statistic is N (0, 1) only when m >30, n
>30, mpX> 5, m(1− pX) > 5, npY > 5 and n(1− pY) > 5.

6.7 KEY WORDS

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Hypothesis, Population, Proportion Test of Hypothesis

NOTES
6.8 ANSWER TO CHECK YOUR PROGRESS

1. Hypothesis testing is a statistical method that is used in making

statistical decisions using experimental data
2. When n≥30
𝑃𝑄
3.
𝑛

6.9 QUESTION AND EXERCISE

SHORT ANSWER QUESTIONS

1. List the possible alternative hypotheses and the corresponding
rejection rules followed in testing equality of two population
means.
2. Specify the alternative hypotheses and the rejection rules
prescribed for testing equality of two population proportions
LONG ANSWER QUESTIONS
1. Explain the general procedure to be followed for testing of
hypotheses.
2. Explain the procedure for testing hypotheses for population mean,
when the population variance is unknown.
3. How will you formulate the hypotheses for testing equality of
means of two populations, when the population variances are
known? Describe the method.
4. Describe the procedure for testing hypotheses concerning equality
of means of two populations, assuming that the population
variances are unknown.
5. Give a detailed account on testing hypotheses for population
proportion.
6. Explain the procedure of testing hypotheses for equality of
proportion of two populations. Interest of XII Students on
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Residential Schooling was investigated among randomly selected

119
 Test of Hypothesis students from two regions. Among 300 students selected from
NOTES Region A, 34 students expressed their interest. Among 200
students selected from Region B, 28 students expressed their
interest. Does this information provide sufficient evidence to
conclude at 5% level of significance that students in Region A are
more interested in Residential Schooling than the students in
Region B?

6.10 FURTHER READINGS

1. Statistics (Theory & Practice) by Dr. B.N. Gupta.
SahityaBhawanPublishersand Distributors (P) Ltd., Agra.
2. Statistics for Management by G.C. Beri. Tata McGraw Hills
PublishingCompany Ltd., New Delhi.
3. Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw HillPublishing Company Ltd., New Delhi.
4. Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd.,New Delhi.
5. Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons.,NewDelhi.
6. Statistical Method by S.P. Gupta. Sultan Chand and Sons., New
Delhi.
7. Statistics for Management by Richard I. Levin and David S.
Rubin. PrenticeHall of India Pvt. Ltd., New Delhi.

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 UNIT 7 - CHI – SQUARE TEST Chi –Square Test

NOTES
Structure
7.0 Introduction
7.1 Objectives
7.2 Characteristics of Chi –Square Test
7.3 Uses of Chi –Square Test
7.4 Steps of Chi –Square Test
7.5 Summary
7.6 Questions
7.0 INTRODUCTION
A chi-squared test, also written as χ2 test, is any statistical
hypothesis test where the sampling distribution of the test statistic is a
chi-squared distribution when the null hypothesis is true. Without other
qualification, 'chi-squared test' often is used as short for Pearson's chi-
squared test.
The chi-squared test is used to determine whether there is a
significant difference between the expected frequencies and the observed
frequencies in one or more categories.
Chi square test is applied in statistics to test the goodness of fit to
verify the distribution of observed data with assumed theoretical
distribution. Therefore, it is a measure to study the divergence of actual
and excepted frequencies. it has great use in statistics, specially in
sampling studies, where we except a doubted coincidence between
actual and excepted frequencies, and the extent to which the difference
can be ignored, because of fluctuations in sampling.
7.1 OBJECTIVES
The student will be able to
 Understand the purpose for using chi-square test
 Understand the procedures for Analysis of variance
 Understand the characteristics and of chi-square test
 Solve problems to test the hypothesis whether the population
has a particular variance using chi-square test
7.2 CHARACTERISTICS OF χ2 TEST
1. Test is based on events or frequencies, whereas in theoretical
distribution, the test is based on mean and standard deviation.
2. To draw inferences, this test is applied, specially testing the
hypothesis but not useful for estimation.
3. The test can be used between the entire set of observed and
excepted frequencies.
4. For every increase in the number of degree of freedom, a new χ2
distribution is formed.
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 Chi –Square Test

NOTES 7.3 USES OF χ2 TEST

χ2 Test of goodness of fit
Through the test we can find out the deviations between the
observed values and excepted values. Here we are not concerned with the
parameters but concerned with the form of distribution. Karl Pearson has
developed a method to test the difference between the theoretical value
(hypothesis) and the observed value. A Greek letter χ2 is used to describe
the magnitude of difference between the fact and theory.
The χ2 may be defined as,
O−E 2
χ2 =
E
O = Observed Frequencies
E = Excepted Frequencies

7.4 STEPS OF χ2 TEST

1. A hypothesis is established along with the significance level.
2. Compute deviation between observed value and excepted value
(O-E).
3. Square the deviations calculated (O-E)2.
4. Divide the (O-E)2 by its excepted frequency.
5. Add all the values obtained in step 4.
6. Find the value of χ2 table at certain level of significance, usually
5% level.
If the calculated value of χ2 is greater than the table value of χ2, at
certain level of significance, we reject the hypothesis. If the
computed value of χ2 is less than the table value, at a certain degree of
level of significance, it is said to be non-significant. This implies that
the discrepancy between the observed frequencies may be due to
fluctuations in the simple sampling.
Example:
In a certain ample of 2000 families, 1400 families are consumers of tea.
Out of 1800 Hindu families, 1236 families consume tea. Use χ2test and
state whether there is any significant difference between consumption of
tea among Hindu and non-Hindu families.
Hindu Non – Hindu Total
Consuming Tea 1236 164 1400
Non – Consuming 564 36 600
Tea
Total 1800 200 2000

Solution
On tabulation of the information in a 2x2 contingency table, we
get:
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 Chi –Square Test

NOTES
Observed Frequencies
Hindu Non – Total
Hindu
Consuming Tea 1236 164 1400
Non – Consuming 564 36 600
Tea
Total 1800 200 2000

Excepted Frequencies
Hindu Non – Total
Hindu
Consuming Tea 1260 140 1400
Non – Consuming 540 60 600
Tea
Total 1800 200 2000

Calculation of χ2
O E O–E (O-E)2 (O-E)2/ E
1236 1260 -24 576 0.457
564 540 24 576 1.068
164 140 24-24 576 4.114
36 60 576 9.600
∑(O-E)2/
E=15.239
d.f is 1, Table value of 𝑟2 0.05 for 1 d.f = 3.841.
For a contingency table, 2x2 table, the degree of freedom is

V = (c-1) (r-1) = (2-1) (2-1)= 1.

The calculated value of χ2 15.239 is higher than the table value i.e., 3.841;
therefore the null hypothesis is rejected.
Hence, the two communities differ significantly as far as
consumption of a tea is concerned.

7.5. SUMMARY
 The uses of distribution are testing the specified variance of a normal
population, testing goodness of fit and testing independence of
attributes
 Through the test we can find out the deviations between the observed
values and excepted values. Here we are not concerned with the
parameters but concerned with the form of distribution. Self-Instructional Material

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 Chi –Square Test

NOTES

7.6 Questions & Exercises

SHORT ANSWER QUESTION:
1. Define chi square test
2. What are the condition for the validity of chi square test
3. Five applications of chi square test
4. What are the uses of chi square

LONG ANSWER QUESTION:

1. Explain the steps of chi-square test
2. Write down steps for testing the significance of goodness of fit

7.11 FURTHER READINGS

1. Spiegel, Murray R.: Theory and Practical of Statistics.,
London
2. McGraw Hill Book Company.
3. Yamane, T.: Statiscs: An Introductory Analysis, New York,
HarperedRow Publication
4. R.P. Hooda: Statistic for Economic and Management
McMillan IndiaLtd.
5. G.C. Beri: Statistics for Mgt., TMA
6. J.K. Sharma: Business Statistics, Pearson Education

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 Unit – VIII F – TEST F-test
NOTES
Structure

8.1 Introduction

8.2 Analysis of Variance (ANOVA)

8.3 Assumptions in Analysis of Variance

8.4 Basic steps in Analysis of Variance

8.4.1 One Way ANOVA

8.4.2 Two Way ANOVA

8.5 Summary

8.6 Key Words

8.7 Answer to Check Your Progress

8.8 Questions and Exercise

8.9 Further Readings

8.1 Introduction

An F-test is any statistical test in which the test statistic has an F-

distribution under the null hypothesis . It is most often used when
comparing statistical models that have been fitted to a data set, in order to
identify the model that best fits the population from which the data were
sampled.

8.2 ANALYSIS OF VARIANCE (ANOVA)

Analysis of variance (ANOVA) is a collection of statistical models
and their associated estimation procedures (such as the "variation" among
and between groups) used to analyze the differences among group means
in a sample. ANOVA was developed by statistician and evolutionary
biologist Ronald Fisher. The ANOVA is based on the law of total
variance, where the observed variance in a particular variable is
partitioned into components attributable to different sources of variation.
In its simplest form, ANOVA provides a statistical test of whether two or
more population means are equal, and therefore generalizes the t-test
beyond two means.

8.3 ASSUMPTIONS IN ANALYSIS OF VARIANCE

1. Each of the samples is strained from a normal distribution.
2. The variances for the population from which samples have been
drained are equal.
3. The variation of each value around its own grand mean should be
independent for each value.
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 F-test
NOTES
8.4 BASIC STEPS IN ANALYSIS OF VARIANCE
Determine
1. One estimate of the population variance from the variance among
the sample means.
2. Determine a second estimate of the population variance from the
variance within the sample.
3. Compare these two estimates if they are approximately equal in
value, accept the null hypothesis.

8.4.1 One-Way Anova

In statistics, one-way analysis of variance (abbreviated one-way
ANOVA) is a technique that can be used to compare means of two or
more samples (using the F distribution). This technique can be used only
for numerical response data, the "Y", usually one variable, and numerical
or (usually) categorical input data, the "X", always one variable, hence
"one-way".
The ANOVA tests the null hypothesis that samples in all groups are
drawn from populations with the same mean values. To do this, two
estimates are made of the population variance. These estimates rely on
various assumptions.
The ANOVA produces an F-statistic, the ratio of the variance
calculated among the means to the variance within the samples.When
there are only two means to compare, the t-test and the F-test are
equivalent; the relation between ANOVA and t is given by F = t 2. An
extension of one-way ANOVA is two-way analysis of variance that
examines the influence of two different categorical independent variables
on one dependent variable.
Example:
In order to determine whether there is significant difference in the
durability of 3 makes of computers, samples of size 5 are selected from
each make and the frequency of repair during the 1 st year of purchase is
observed. The results are as follows:
Makes
I II III
4 7 6
6 9 4
8 11 6
9 12 3
7 5 2
In view of the above data, what conclusion can you draw?

Solution:
Null Hypothesis Ho= there is no significant difference in the durability of
3 makes of computers.
Computer I Computer II Computer III
2 2
X1 X1 X2 X2 X3 X32
4 16 7 49 6 36
6 36 9 81 4 16
8 64 11 121 6 36
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 9 81 12 144 3 9 F-test
7 49 5 25 2 4
∑X1=34 ∑X1 =246 ∑X2=44 ∑X2 =420 ∑X3=21 ∑X32=101
2 2 NOTES

Step – 1
Sum of all items (T) = ∑X1+∑X2+∑X3
= 34+44+21
=99

Step – 2
Correction factor (C.F) = T2= (99)2= 653.4
N 15

Step – 3
TSS = Sum of Squares of all the items – C.F
= ∑X12+∑X22+∑X32 - T2
N
= 246+420+101-653.4= 113.6

Step – 4
SSC = Sum of Squares between samples – C.F
= (∑X1)2 (∑X2)2 (∑X3)2 - C.F
n + n + n
= (34)2(44)2 (21)2 - 653.4
5 + 5 + 5
= 231.2 + 387.2 + 88.5 – 653.= 53.5
Step – 5
MSC = Sum of squares between samples
d.f

= 53.5
2

= 26.75
Step – 6
SSE = Total sum of squares – Sum of Squares between samples

= 113.6 – 53.5
= 60.1

Step – 7
MSE = Sum of squares within samples
d.f
= 60.1
12
= 5.00

ANOVA TABLE
Source of Sum of Degrees of Mean F - ratio
variations squares freedom Squares
Between SSC = 53.5 3-1=2 MSC= SSC
samples d.f
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 F-test = Fc = MSC
26.75 MSE
NOTES
Within SSE = 60.1 15-3=12 MSE= SSE = 5.35
samples d.f
= 5.00

Tabulated value of F for V1=2 and V2=12 at 5% level of

significance is 3.88. FTab=3.88. Calculated value of F is Fc = 5.35. Since
Fc >FTab. We reject the null hypothesis H0. There is significant difference
in the durability of 3 makes of computers.
8.4.2 TWO-WAY ANOVA
The two-way ANOVA compares the mean differences between
groups that have been split on two independent variables (called factors).
The primary purpose of a two-way ANOVA is to understand if there is
an interaction between the two independent variables on the dependent
variable.
This is a term which stems from agricultural research in which
several variables or treatments are applied to different blocks of land for
repetition or replication of the experimental effects. The advantages of a
completely randomized experimental design are as follows.
(a) Easy to lay out.
(b) Allows flexibility.
(c) Simple statistical analysis.
(d) The lot of information due to missing data is smaller than with
any other design.
But this design is usually suited (i) only for small number of treatments
and (ii) for homogeneous experimental material.
Example:
There varieties A, B, C of crop are tested in a randomized block design
with four replications. The plot yields in pounds are as follows

Varieties Yields
1 2 3 4
A 6 5 8 9
B 8 4 6 9
C 7 6 10 6

Solution
Null hypothesis H0: There is no significant difference between varieties
(rows) and between yields,(blocks).

Varieties Yields
1 2 3 4 Total
A 6 4 6 6 24
B 7 5 8 9 28
C 8 6 10 9 32
Total 21 15 24 24 84

Step -1
Grand total (T) = 84
Step – 2
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 T2 (84)2
Correction factor (C.F) = N = 12 = 588 F-test
Step – 3 NOTES
SSC = Sum of squares between blocks (columns)
= (21)2 + (15)2 + (24)2+ (24)2 – C.F
3 3 3 3
= 606 – 588
= 18
Step – 4
SSR = Sum of squares between varieties (Rows)
= (24)2 + (28)2 + (32)2 – C.F
4 4 4
= 596 – 588
=8
Step – 5
TSS = Total sum of squares – C.F
=
[(6)2+(7)2+(8)2+(4)2+(6)2+(5)2+(8)2+(6)2+(10)2+(6)2+(9)2+(9)2] - 588
= 624 – 588
= 36
Step – 6
SSE = Residual sum of squares
= TSS-(SSC+SSR)
= 36 – (18+8) = 10
um Step- 7
d.f = v3 = (c-1) (r-1)
S = (3) (2)
=6

ANOVA TABLE
Source of Sum of Degree of Mean F-ratio
variation squares freedom Squares
Between SSC= 18 c-1 MSC=SSC Fc=
Blocks 4-1= 3 d.f MSC
(Columns) =6 MSE
= 3.6
Between SSR=8 r-1 MSR=SSR FR=
Varieties 3-1=2 d.f MSR
(Rows) =4 MSE
= 2.4
Residual SSE=10 (r-1)(c-1) MSE=SSE
=6 d.f
=1.667

(i) The tabulated value of F for (3,6) d.f at 5 % level of significance

is 4.76.Ftab=4.76. since Fc<Ftab, we accept the null hypothesis H0.
That is there is no significant difference between yields.

(ii) The tabulated value of F for (2,6) d.f at 5 % level of significance

is 5.14.Ftab=5.14. since FR<Ftab, we accept the null hypothesis H0.
That is there is no significant difference between varieties.
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 F-test
CHECK YOUR PROGRESS - 1
NOTES
1. By which other name is the Chi-Square goodness of fit test
known?
2. What type of data do you need in Chi-Square test?
3. What symbol is used to represent Chi-Square?
4. What is Analysis of Variance?
5. What is the main purpose of Two way ANOVA test?
6. The variation of each value around its own grand mean should be
______________ for each value

8.5 SUMMARY
 The uses of distribution are testing the specified variance of a normal
population, testing goodness of fit and testing independence of
attributes
 Analysis of variance (ANOVA) is a collection of statistical
models and their associated estimation procedures used to analyze
the differences among group means in a sample
 One-way analysis of variance (abbreviated one-way ANOVA) is a
technique that can be used to compare means of two or more samples
 The two-way ANOVA compares the mean differences between
groups that have been split on two independent variables
8.6 KEY WORDS
Chi-square, Analysis of Variance, One way method, Two way method

8.7 ANSWER TO CHECK YOUR PROGRESS

1. One sample chi square

2. Categorical
3. χ2
4. ANOVA provides a statistical testof whether two or more
population means are equal, and therefore generalizes the t-
test beyond two means
5. The primary purpose of a two-way ANOVA is to understand if
there is an interaction between the two independent variables
on the dependent variable
6. Independent

8.8 QUESTIONS AND EXERCISE

SHORT ANSWER QUESTION:
1. Define chi square test
2. What are the condition for the validity of chi squate test
3. Five applications of chi square test
4. What is analysis of variance?
5. What are the assumptions of ANOVA
LONG ANSWER QUESTION:
1. Explain the steps of chi-square test
2. Write down steps for testing the significance of goodness of fit
3. Write the model ANOVA table for one way classification
4. Compare one way and two way ANOVA
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 F-test
8.9 FURTHER READINGS
NOTES
1. Spiegel, Murray R.: Theory and Practical of Statistics.,
London
2. McGraw Hill Book Company.
3. Yamane, T.: Statiscs: An Introductory Analysis, New York,
HarperedRow Publication
4. R.P. Hooda: Statistic for Economic and Management
McMillan IndiaLtd.
5. G.C. Beri: Statistics for Mgt., TMA
6. J.K. Sharma: Business Statistics, Pearson Education

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Correlation Analyses UNIT IX - CORRELATION
NOTES ANALYSES
Structure
9.0 Introduction
9.1 Objectives
9.2 Correlation
9.3 Linear Correlation
9.4 Types of Correlation
9.5 Scatter Diagram
9.6 Two – Way table
9.7 Pearson’s Correlation Coefficient
9.8 Spearman’s rank Correlation Coefficient
9.9 Properties of Correlation Coefficient
9.10 Summary
9.11 Key Words
9.12 Answer to Check Your Progress
9.13 Questions and Exercise
9.14 Further Readings
9.0 INTRODUCTION
In our day to day life, we find many situations when a mutual
relationship exists between two variables i.e., with change (fall or rise) in
the value of one variable there may be change (fall or rise) in the value of
other variable For example, as price of a commodity increases the
demand for the commodity decreases. In the increase in the levels of
pressure, the volume of a gas decreases at a constant temperature. These
facts indicate that there is certainly some mutual relationships that exist
between the demand of a commodity and its price, and pressure and
volume. Such association is studied in correlation analysis. The
correlation is a statistical tool which measures the degree or intensity or
extent of relationship between two variables and correlation analysis
involves various methods and techniques used for studying and
measuring the extent of the relationship between the two variables.
9.1 OBJECTIVES
After studying this chapter students will be able to understand
 Understand the concept of scatter Diagram
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132
 methods of computing it. Correlation Analyses
 Spearman’s Rank correlation co-efficient
NOTES
9.2 CORRELATION
Correlation is a statistical technique which measures and analyses the
degree or extent to which two or more variables fluctuate with reference
to one another. It denotes the inter-dependence amongst variables. The
degrees are expressed by a coefficient which ranges between -1 to +1.
The direction of change is indicated by + or - signs; the former, refers to
the movement in the same direction and the later, in the opposite
direction. An absence of correlation is indicated by zero. Correlation thus
expresses the relationship through a relative measure of change and it has
nothing to do with the units in which the variables are expressed.
9.3 LINEAR CORRELATION
If the amount of change in one variable tends to bear constant ratio
to the amount of change in the other variable then the correlation is said
to be linear. For example,
X 5 10 15 20 25

Y 90 170 230 310 420

9.4 TYPES OF CORRELATION

There are three important types of correlation. They are
1. Positive and Negative correlation
2. Simple, Partial and Multiple correlation
3. Linear and Non-Linear correlation
1. Positive and Negative correlation
Correlation is classified according to the direction of change in
the two variables. In this regard, the correlation may either be positive or
negative.
Positive correlation refers to the change (movement)of variables
in the same direction. Both the variables are increased or decreased in the
same direction, it is called positive correlation. It is otherwise called as
direct correlation. For example, a positive correlation exists between ages
of husband and wife, height and weight of a group of individuals,
increase in rainfall and production of paddy, increase in the offer and
sales.
Negative correlation refers to the change (movement) of variables
in the opposite direction. In other words, an increase (decrease) in the
value of one variable is followed by a decrease by a decrease (increase)
in the value of the other is said to be negative correlation. It is otherwise
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133
 between price and demand, yield of crop and price.
Correlation Analyses
The following expels illustrate the concept of positive correlation
NOTES and negative correlation.
Positive correlation

X 5 7 9 11 16 20 28

y 20 26 35 37 48 50 55

Negative Correlation

X 14 17 23 35 46

y 16 12 10 9 5

2.Simple, Partial and Multiple Correlations

Simple correlation is a measure used to determine the strength
and the direction of the relationship between two variables, X and Y. A
simple correlation coefficient can range from –1 to 1. However,
maximum (or minimum) values of some simple correlations cannot reach
unity (i.e., 1 or –1).
When we study only two variables, the relationship is described
as simple correlation; example, quantity of money and price level,
demand and price, etc. But in a multiple correlation we study more than
two variables simultaneously; example, the relationship of price, demand
and supply of a commodity.
The study of two variables excluding some other variables is
called partial correlation. For example, we study price and demand,
eliminating the supply side.
3. Linear and Non-Linear Correlation
Linear correlation is a measure of the degree to which two
variables vary together, or ameasure of the intensity of the association
between two variables.
If the ratio of change between two variables is uniform, then the
there will be linear correlation between them. Consider the following.

X 6 12 18 24

Y 5 10 15 20

The ratio of change between the variables is same.

In a curvilinear or non linear correlation, the amount of change in
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134
other variables. The graph of non-linear or curvilinear relationship will Correlation Analyses
form a curve.
In majority of cases, we find curvilinear relationship, which is a NOTES
complicated one, so we generally assume that the relationship between
the variables under the study is linear. In social sciences, linear
correlation is rare, because the exactness is not as perfect as in natural
sciences.

CHECK YOUR PROGRESS- 1

1. What is correlation?
2. Define linear correlation?
3. List out the different types of correlation?

9.5 SCATTER DIAGRAM

It is simple and attractive method of diagrammatic representation.
In this method, the given data are plotted on a graph sheet in the form of
dots. The x variables are plotted on the horizontal axis and y variables on
the vertical axis. Now we can know the scatter or concentration of the
various points. This will show the type of correlation.

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Correlation Analyses

NOTES

9.6 TWO-WAY TABLE

Atwo-way table (also called a contingency table) is a useful tool for
examining relationships between categorical variables; the entries in the
cells of two-way table can be frequency counts or relative frequencies
(just like a one-way table).
Dance Sports TV Total

Men 2 10 8 20

Women 16 6 8 30

Total 18 16 16 50

Above a two-way table shows the favourite leisure activities for

50 adults-20 men and 30 women. Because entries in the table are
frequency counts, the table is a frequency table.
9.7 PEARSON’S CO-EFFICIENT OF CORRELATION
Karl Pearson (1867-1936), the British biometrician suggested this
method. It is popularly known as Pearson’s co-efficient of correlation. It is
mathematical method for measuring the magnitude of linear relationship
between two variables.
Pearson's correlation coefficient is the test statistics that measures the
statistical relationship, or association, between two continuous variables. It is
known as the best method of measuring the association between variables of
interest because it is based on the method of covariance.

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 Correlation Analyses
(a)Arithmetic mean Method
∑xy
NOTES
r=
∑x2 ∑y2
Example:
Find Pearson’s Co-efficient of correlation from the following data

Sales 15 18 22 28 32 46 52

Profit 52 66 78 87 96 125 141

Solution
Let the sales be denoted by x and the profit by y.
Computation of coefficients of correlation

X 𝐗 X2 Y 𝐘 Y2 XY
−𝐗 −𝐘

15 -15.43 238.98 52 -40.14 1611.22 619.36

18 -12.43 154.50 66 -26.14 683.30 324.92

22 -8.43 71.06 78 -14.14 199.94 119.20

28 -2.43 5.90 87 -5.14 26.42 12.49

32 1.57 2.46 96 3.86 14.90 6.06

46 15.57 242.42 125 32.86 1079.78 511.63

52 21.57 465.26 141 48.86 2387.30 1053.91

∑x ∑x=- ∑x2=1179.68 ∑y=645 ∑y= ∑y2 = ∑xy

0.01 0.02
=213 6,002.86 =2647.57

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Correlation Analyses

NOTES
X=∑x/N =213/7=30.43
Y=∑y/N =645/7 =92.14
∑x2=1179.68,∑y2=6002.86,∑xy=2647.57
∑xy 2647.57 2647.57
r= = =
∑x 2 ∑y 2 1179.68x6,002.86 1179.68x6,002.86

2647.57 2647.57
= = = 0.99
34.35x77.48 2661.44

Therefore, there is a high degree positive correlation between the x and y.

9.8 SPEARMEN’S RANK CORRELATION CO-
EFFICIENT
In statistics, Spearman's rank correlation coefficient or Spearman's rho,
named after Charles Spearman and often denoted by the Greek letter
P(rho)or as rs is a nonparametric measure of rank correlation (statistical
dependence between the rankings of two variables). It assesses how well
the relationship between two variables can be described using a
monotonic function.
The Spearman correlation between two variables is equal to the
Pearson correlation between the rank values of those two variables; while
Pearson's correlation assesses linear relationships, Spearman's correlation
assesses monotonic relationships (whether linear or not). If there are no
repeated data values, a perfect Spearman correlation of +1 or −1 occurs
when each of the variables is a perfect monotone function of the other.
6∑𝐷 2
𝑟𝑠 = 1 −
𝑛(𝑛 2 −1)
Spearman's coefficient is appropriate for both continuous and discrete
ordinal variables. Both Spearmen’s can be formulated as special cases of
a more general correlation coefficient.
Example:
Two faculty members ranked 12 candidates for scholarships. Calculate
the spearman rank correlation coefficient.

Candidate 1 2 3 4 5 6 7 8 9 10
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 Professor A 8 12 6 4 9 15 8 7 16 13 Correlation Analyses

Professor B 9 16 10 8 14 19 12 11 20 17 NOTES

Solution

Rx Ry d= Rx- Ry d2

8 9 -1 1

12 16 -4 16

6 10 -4 16

4 8 -4 16

9 5 4 16

15 10 5 25

8 7 1 1

7 11 -4 16

16 15 1 1

13 18 -5 25

∑ d2=133

6∑D 2 6(133) 798

rs = 1 − =1 − =1−
n(n 2 −1) 10(100−1) 990

= 1-0.8060
r = 0.194

CHECK YOUR PROGRESS - 2

4. What are the uses of scattered diagram?
5. Write the formula to calculate spearman’s rank correlation?

9.9 PROPERTIES OF CORRELATION CO-EFFICIENT

1. Coefficient of Correlation lies between -1 and +1:The coefficient
of correlation cannot take value less than -1 or more than one +1.
Symbolically,-1<=r<= + 1 or | r | <1. Self-Instructional Material

139
 2. Coefficients of Correlation are independent of Change of Origin:
Correlation Analyses
This property reveals that if we subtract any constant from all the
values of X and Y, it will not affect the coefficient of correlation.
NOTES
3. Coefficients of Correlation possess the property of symmetry:
The degree of relationship between two variables is symmetric.
4. Coefficient of Correlation is independent of Change of Scale:
This property reveals that if we divide or multiply all the values
of X and Y, it will not affect the coefficient of correlation.
5. The value of the co efficient of correlation shall always lie
between +1 and -1.
6. When r = + 1, then there is perfect positive correlation between
the variables.
7. When r = - 1, then there is perfect negative correlation between
the variables.
8. When r = 0, then there is no relationship between the variables.
The third formula given above, that is
∑xy
r=
∑x 2 ∑y 2

It is easy to calculate, and it is not necessary to calculate the

standard deviation of X and Y series separately.
9.10 SUMMARY
 The term correlation refers to the degree of relationship
between two or more variables.
 Scatter diagram is a graphic device for finding correlation
between two variables.
∑xy
 Karl Pearson correlation coefficient r(x,y) = r=
∑x2 ∑y2
 Correlation coefficient r lies between –1 and 1. (i.e) –1≤r≤1
 When r=+1 , then the correlation is perfect positive
 When r=–1 , then the correlation is perfect negative
 When r=0, then there is no relationship between the
variables, (i.e) the variables are uncorrelated.
 Spearman’s Rank correlation deals with qualitative
characteristics.
9.11 KEY WORDS
Correlation , Spearman’s Rank correlation, Pearson correlation,
Correlation Coefficient , Scattered Diagram
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9.12 ANSWER TO CHECK YOUR PROGRESS

140
 1. The term correlation refers to the degree of relationship between Correlation Analyses
two or more variables
2. Linear correlation is a measure of the degree to which two NOTES
variables vary together, or ameasure of the intensity of the
association between two variables
3. Positive and Negative correlation ,Simple, Partial and Multiple
correlation,Linear and Non-Linear correlation
4. Scatter diagram is a graphic device for finding correlation
between two variables
6∑D 2
5. rs = 1 −
n(n 2 −1)

9.13 QUESTIONS AND EXERCISE

SHORT ANSWER QUESTIONS
1. Calculate the coefficient of correlation from the following data:
ΣX=50, ΣY=–30, ΣX2 =290, ΣY2 =300, ΣXY=–115, N=10
2. The following data pertains to the marks in subjects A and B in a
certain examination. Mean marks in A = 39.5, Mean marks in B=
47.5 standard deviation of marks in A =10.8 and Standard
deviation of marks in B= 16.8. coefficient of correlation between
marks in A and marks in B is 0.42. Give the estimate of marks in
B for candidate who secured 52 marks in A.
3. What is scattered diagram and explain it?
LONG ANSWER QUESTIONS
1. A random sample of recent repair jobs was selected and estimated
cost, actual cost were recorded. Calculate the value of Spearman’s
correlation
Estimated cost 70 68 67 55 60 75 63 60 72
65 65 80 60 68 75 62 60 70
Actual cost
2. Distinguish between Karl Pearson’s coefficient and Spearman’s
correlation coefficient
3. Explain the types of correlation with examples
9.14 FURTHER READINGS
1. Statistics (Theory & Practice) by Dr. B.N. Gupta. SahityaBhawan
Publishers andDistributors (P) Ltd., Agra.
2. Statistics for Management by G.C. Beri. Tata McGraw Hills
Publishing CompanyLtd., New Delhi.
3. Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw HillPublishing Company Ltd., New Delhi.
4. Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd., NewDelhi.
5. Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons.,NewDelhi. Self-Instructional Material

141
 6. Statistical Method by S.P. Gupta. Sultan Chand and Sons., Delhi.
Correlation Analyses

NOTES

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Spearman’s Rank Correlation UNIT X - SPEARMAN’S RANK
NOTES CORRELATION
Structure
10.0 Introduction
10.1 Objectives
10.2 Regression
10.3 Linear Regression
10.4 Types of Regression
10.4.1Regression Equation of Y on X
10.4.2 Regression Equation of X on Y
10.5 Curve fitting by the Method of Least square
10.6 Derivations of Regression Equation
10.7 Properties of Correlation Coefficient
10.8 Summary
10.9 Key Words
10.10 Answer to Check Your Progress
10. 11Questions and Exercise
10.12 Further Readings
10.0 INTRODUCTION
Regression means stepping back or going back. It was first used by
Francis Galton in 1877. He studied the relationship between the
height of father and their sons. The study revealed that
 Tall fathers have tall sons and short fathers have short sons.
 The mean height of the sons of tall father is less than mean height
of their fathers.
 The mean height of sons of short fathers is more than the mean
height of their fathers.
The tendency to going back was called by Galton as „Line of
Regression‟. This line describing the average relationship
between two variables is known as the line of Regression.
In statistical modelling, regression analysis is a set of statistical
processes for estimating the relationships among variables. It
includes many techniques for modelling and analyzing several variables,
when the focus is on the relationship between a dependent variable and
one or more independent variables (or 'predictors'). More specifically,
regression analysis helps one understand how the typical value of
the dependent variable (or 'criterion variable') changes when any
one of the independent variables is varied, while the other independent
variables are held fixed.
Regression analysis is widely used for prediction and forecasting,
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where its use has substantial overlap with the field of machine
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learning. Spearman’s Rank Correlation

NOTES

10.1 OBJECTIVES
After studying this chapter students will be able to understand
 Concept of Regression and Regression coefficients
 Types of regression equations
 Regression lines both x on y and y on x
10.2 REGRESSION
Regression analysis refers to assessing the relationship between the
outcome variable and one or more variables. The outcome variable is
known as the dependent or response variable and the risk elements, and
cofounders are known as predictors or independent variables. The
dependent variable is shown by “y” and independent variables are shown
by “x” in regression analysis.
10.3 LINEAR REGRESSION
Linear regression attempts to model the relationship between two
variables by fitting a linear equation to observed data. One variable is
considered to be an explanatory variable, and the other is considered to
be a dependent variable. For example, a modeler might want to relate the
weights of individuals to their heights using a linear regression model.
10.4 TYPES OF REGRESSION EQUATIONS
The Regression Equation is the algebraic expression of the regression
lines. It is used to predict the values of the dependent variable from the
given values of independent variables. As there are two regression lines,
there are two regression equations. For the two variables X and Y, there
are two regression equations. They are.
o Regression equation of X on Y.
o Regression equation of Yon X.
10.4.1 Regression Equation of X on Y
The straight line equation is X=a+by
Here a andb are unknown constants, which determines the
position. The constant a is the intercept on the other value; the constant b
is the slope; the following two normal equations are derived;
∑x = na + b∑y
∑xy = a∑x + b∑y2
The Regression equation X on Y is used to find out the values of X for
given value of Y. Self-Instructional Material

10.4.2 Regression Equation of Y on X

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 The straight line equation is Y=a+bx
Spearman’s Rank Correlation
The following two normal equationsare derived
NOTES
∑y=na+b∑x
∑xy=a∑x+b∑x2
The Regression equation Y on X is used to ascertion the value of y for a
given value of x.
Example:
Find out the regression equation, x on y and y on x from the following
data:

X 15 20 25 30 35 40 45

y 8 14 20 26 32 38 44

Solutions

x y X2 Y2 xy

15 8 225 64 120

20 14 400 196 280

25 20 625 400 500

30 26 900 676 780

35 32 1225 1024 1120

40 38 1600 1444 1520

45 44 2025 1936 1960

∑x=210 ∑y=182 ∑x2=7000 ∑y2=5740 ∑xy=6300

∑x=210; ∑y=182; ∑x2=7000; ∑y2=5740; ∑xy=6300

Regression equation x on y is y = a + by
Hence ∑x=na+b∑y
∑xy=a∑x+b∑y2
Self-Instructional Material 210=7a + 182b
(1)
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 6300=182a+5740b (2) Spearman’s Rank Correlation

NOTES

Multiplying equation (1) by 26

5460=182a+4732b
(3)
6300 = 182a + 5740b
(4)
Deducting (3) from Equation (2)
6300=182a+5740b
(4)
5460=182a+4732b
(3)
(-) (-) (-)
840=0 + 1008b
Therefore, b=840/1008=0.83
Substituting the value of b in Eq.(1)
210=7a+(182x0.83)
210=7a+151.06
7a + 151.06=210
7a=210-151.06
7a=58.94
a= 8.42
Hence, x=a+by
x=8.42 + 0.83 y
Regression Eq of y on x y=a+bx
Hence, ∑y=Na+b∑y2
182=7a+210b
(1)
6300=210a+700b
(2)
Multiplying Eq.(1) by 30
5460=210a+6300b
(3)
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6300=210a+7000b
(4)
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Spearman’s Rank Correlation
Deducting Eq.(4)from Eq.(3)
NOTES
6300=210a+7000b
(3)
5460=210a+6300b
(4)
840=0 +700b
700=840
b=840/700
=1.2
Substituting the value of b in Eq.(1)
182=7a+(120x1.2)
182=7a+252
7a+252=182
7a=182-252
7a= -70
a= -10
Therefore, y= -10+1.

10.5 CURVE FITTING BY THE METHOD OF LEAST

SQUARE
1. Curve Fitting
Curve fitting is the process of introducing mathematical
relationships between dependent and independent variables in the form of
an equation for a given set of data.
2. Method of Least Squares
The method of least squares helps us to find the values of
unknowns a and b in such a way that the following two conditions are
satisfied:
 The sum of the residual (deviations) of observed values of Y and
corresponding expected (estimated) values of Y will be
zero. ∑(Y−Yˆ)=0 ∑(Y−Y^)=0.
 The sum of the squares of the residual (deviations) of observed values
of YY and corresponding expected values (YˆY^) should be at
least ∑(Y−Yˆ)2∑(Y−Y^)2.
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3. Fitting of a Straight Line: Spearman’s Rank Correlation

A straight line can be fitted to the given data by the method of NOTES
least squares. The equation of a straight line or least square line
isY=a+bX, where a and b are constants or unknowns.
To compute the values of these constants we need as many equations as
the number of constants in the equation. These equations are called
normal equations. In a straight line there are two constants a and b so we
require two normal equations.
Normal Equation for „a‟ ∑Y = na+ b∑X

Normal Equation for „b‟ ∑XY = a∑X+ b∑X2

Example:
The given example explains how to find the equation of a straight
line or a least square line by using the method of least square, which is
very useful in statistics as well as in mathematics.

X 1 2 3 4 5

y 2 5 3 8 7

Solution

X Y XY X2 1.1+1.3X Y-

1 2 2 1 2.4 -0.4

2 5 10 4 3.7 1.3

3 3 9 9 5.0 -2

4 8 32 16 6.3 1.7

5 7 35 25 7.6 -0.6

∑X=15 ∑Y=25 ∑XY=88 ∑X2=55 Trend values ∑(Y- )

The equation of least square line Y=a + bx

Normal equation for „a‟ ∑Y=na+ b ∑X 25

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= 5a + 15b∑Y = na+b∑X 25=5a+15b ---- (1)

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Spearman’s Rank Correlation
Normal equation for „b ∑XY=a∑X+b∑X2 88=15a+55b ----(2)
NOTES

Eliminate a from equation (1) and (2),multiply equation (2) by 3 and

subtract from equation (2). Thus we get the values of a and b.

Here a=1.1 and b=1.3X

For the trends values, put the values of X in the above equation
10.6 DERIVATIONS OF REGRESSION EQUATION
1. When deviations are taken from Arithmetic means of X and Y
The above method of finding out the regression equation is
difficult. Instead, we can use the deviations of X and Y observations
from their respective averages.
(i) Regression equation of X on Y

The regression equation of Y on X can also be expressed in the following

form-
X - X̅ = r σx /σy (Y-Y̅)

Here, X̅ is the average of X observations and Y̅ is the average of Y

observations.
rσx/σy is the regression coefficient of X on Y and is denoted by b xy. bxy
measures the amount of change in X corresponding to a unit change in Y.
r σx/σy = bxy = ∑xy/∑y2
Where x=(X-X̅) and y=(Y-Y̅)
(ii) Regression equation of Y on X
The regression equation of Y on X can also be expressed in the following
form-
Y - Y̅ = r σy/σx(X - X̅)
rσy/σx is the regression coefficient of Y on X and is denoted by b yx. byx
measures the amount of change in Y corresponding to a unit change in X.
r σy/σx = byx = (∑xy)/∑x2
We can calculate the coefficient of correlation which is the geometric
mean of the two regression coefficients (bxy &byx) i.e.
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2. When deviations are Taken from Assumed Mean Spearman’s Rank Correlation

When instead of using actual means of X and Y observations, we use any NOTES
arbitrary item (in the observation) as the mean.
We consider taking deviations of X and Y values from their respective
assumed means.
The formula for calculating regression coefficient when regression is Y
on X is as follows:

Where dx = (X-Ax) {Ax = assumed mean of X observations} and dy =

(Y-Ay) {Ay = assumed mean of Y observations}
The formula for calculating regression coefficient when regression is X
on Y is as follows:

In the case of Grouped frequency distribution, the regression

coefficients are calculated from the bivariate frequency table (or
correlation table).
The formula for calculating regression coefficient (in case of grouped
frequency distribution) when regression is of Y on X is as follows-

Where hx= class interval of X variable and hy = class interval of Y

variable
The formula for calculating regression coefficient (in case of grouped
frequency distribution) when regression is of X on Y is as follows-

Check your Progress - 1

1. What are regression coefficients?
2. What is the formula used to calculate assumed mean?
3. What is method of least square?
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10.7 PROPERTIES OF REGRESSION EQUATION

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 The constant „b‟ in the regression equation (Ye = a + bX) is called as
Spearman’s Rank Correlation
the Regression Coefficient. It determines the slope of the line, i.e. the
NOTES change in the value of Y corresponding to the unit change in X and
therefore, it is also called as a “Slope Coefficient.”
1. The correlation coefficient is the geometric mean of two
regression coefficients. Symbolically, it can be expressed as:

2. The value of the coefficient of correlation cannot exceed unity

i.e. 1. Therefore, if one of the regression coefficients is greater
than unity, the other must be less than unity.
3. The sign of both the regression coefficients will be same, i.e. they
will be either positive or negative. Thus, it is not possible that one
regression coefficient is negative while the other is positive.
4. The coefficient of correlation will have the same sign as that of
the regression coefficients, such as if the regression coefficients
have a positive sign, then “r” will be positive and vice-versa.
5. The average value of the two regression coefficients will be
greater than the value of the correlation. Symbolically, it can be
represented as

6. The regression coefficients are independent of the change of

origin, but not of the scale. By origin, we mean that there will be
no effect on the regression coefficients if any constant is
subtracted from the value of X and Y. By scale, we mean that if
the value of X and Y is either multiplied or divided by some
constant, then the regression coefficients will also change.

Thus, all these properties should be kept in mind while solving

for the regression coefficients.
10.8 SUMMARY
 Linear regression attempts to model the relationship between two
variables by fitting a linear equation to observed data
 Regression analysis refers to assessing the relationship between
the outcome variable and one or more variables
 A straight line can be fitted to the given data by the method of
least squares
 The constant „b‟ in the regression equation (Ye = a + bX) is called
as the Regression Coefficient. It determines the slope of the line,
Self-Instructional Material i.e. the change in the value of Y corresponding to the unit change
in X and therefore, it is also called as a “Slope Coefficient.”
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 Spearman’s Rank Correlation

NOTES

10.9 KEY WORDS

Regression, Linear regression, Types of regression coefficient, Properties

of regression coefficient , straight line, Regression equation, straight line
Deviations, Actual Mean,

10.10 ANSWER TO CHECK YOUR PROGRESS

1. Regression analysis refers to assessing the relationship between
the outcome variable and one or more variables

2. When regression is Y on X

When regression is X on Y

3. The method of least squares helps us to find the values of

unknowns a and b in such a way that the following two conditions
are satisfied:
o ∑(Y−Yˆ)=0 ∑(Y−Y^)=0.
o ∑(Y−Yˆ)2∑(Y−Y^)2.
10.10 QUESTIONS AND EXERCISE
SHORT QUESTION ANSWER
1. What are regression coefficients?
2. Define regression and write down the two regression equations
3. Describe different types of regression
4. What are the uses of regression analysis?
LONG QUESTION AND ANSWER
1. Explain the principle of least squares
2. State the properties of regression equations
3. For 5 observations of pairs of (X, Y) of variables X and Y the Self-Instructional Material
following results are

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 obtained. ΣX=15, ΣY=25, ΣX2=55, ΣY2=135, ΣXY=83. Find the
Spearman’s Rank Correlation
equation of the
NOTES lines of regression and estimate the values of X and Y if Y=8 ;
X=12.
4. Using the following information you are requested to (i) obtain
the linear regression
of Y on X (ii) Estimate the level of defective parts delivered when
inspectionexpenditure amounts to Rs.28,000 ΣX=424, ΣY=363,
ΣX2 =21926, ΣY2 =15123,ΣXY=12815 , N=10. Here X is the
expenditure on inspection, Y is the defectiveparts delivered
10.11 FURTHER READINGS
1. Statistics (Theory & Practice) by Dr. B.N. Gupta. SahityaBhawan
Publishers andDistributors (P) Ltd., Agra.
2. Statistics for Management by G.C. Beri. Tata McGraw Hills
Publishing CompanyLtd., New Delhi.
3. Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw HillPublishing Company Ltd., New Delhi.
4. Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd., NewDelhi.
5. Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons., NewDelhi.
5. 6. Statistical Method by S.P. Gupta. Sultan Chand and Sons.,
New Delhi.

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 UNIT – IX BUSINESS FORECASTING Business Forecasting

NOTES
Structure
11.1 Introduction
11.2 The Objectives of Forecasting
11.3 Prediction, projection and forecasting
11.4 Characteristics of forecasting are as follows
11.5 Steps in Forecasting
11.6 Methods of Business Forecasting

11.1 Introduction
Business forecasting is a method to predict the future, where the future is
narrowly defined by economic conditions. It combines information
gathered from past circumstances with an accurate picture of the present
economy to predict future conditions for a business.

It refers to techniques such as taking a prospective view of how the

economy is likely to turn out in the short-term. Its use is critical for
businesses whenever the future is uncertain. The more they can focus on
the probable outcome, the more success the organization has as it moves
forward.
11.2 The Objectives of Forecasting
In the narrow sense, the objective of forecasting is to produce better
forecasts. But in the broader sense, the objective is to improve
organizational performance—more revenue, more profit, increased
customer satisfaction. Better forecasts, by themselves, are of no inherent
value if those forecasts are ignored by management or otherwise not used
to improve organizational performance.

A wonderfully sinister way to improve forecast accuracy (while ignoring

more important things like order fill, customer satisfaction, revenue
generation, and profit) was provided by Ruud Teunter of Lancaster
University, at the 2008 International Symposium on Forecasting. Teunter
compared various forecasting methods for a data set of 5,000 items having
intermittent demand patterns. (Intermittent patterns have zero demand in
many or most time periods.)

Teunter found that if the goal is simply to minimize forecast error, then
forecasting zero in every period was the best method to use! (The zero
forecast had lower error than a moving average, exponential smoothing,
bootstrapping, and three variations of Croston’s method that were tested.)
However, for proper inventory management to serve customer needs,
forecasting zero demand every period is probably not the right thing to do.

A similar point was made last fall in a Foresight article by Stephan Kolassa
and Roland Martin (discussed in "Tumbling Dice"). Using a simple dice
tossing experiment, they showed the implications for bias in commonly
used percentage error metrics. What makes this important to management
is that if the sole incentive for forecasters is to minimize MAPE, the
forecaster could do best by purposely forecasting too low. This, of course,
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 Business Forecasting could have bad consequences for inventory management and customer
NOTES
service.
11.3 Prediction, projection and forecasting
Forecast is scientific and free from intuition and personal bias, whereas
prediction is subjective and fatalistic in nature.
Forecasting is an extrapolation of past into the future while prediction is
judgmental and takes into account changes taking place in the future.
Therefore, prediction is utilized more in business and economics while
forecasting takes place in weather and earthquakes.
Predicting is saying or telling something before the event while forecasting
is done on the basis of analysis of the past.
Forecasting is still not a complete science as there are chances of error.
Concept of Forecasting
Forecasting is a process of making predictions about the future course of a
business or a company based on trend analysis and past and present data.

So essentially data is collected and studied about the business, and analysis
is done to forecast future scenarios that are likely to occur. Hence
forecasting is an important tool in the process of business planning.

Forecasts are usually done by managers (at different levels, Statisticians,

experts, economists, consultants etc. They involve a lot of data collecting
(both past and present) and data analysis.
There is also the use of scientific techniques and methods. But at the end of
the day, forecasting is not an exact science. There is always some guessing
and observations involved. This is when the experience and knowledge of
these experts come into play.
11.4 characteristics of forecasting are as follows:
Forecasting is strictly concerned with future events only
It analysis the probability of a future event or transaction occurring or
happening
It involves analysis of data from the past and the present
Forecasting uses scientific techniques and methods to make such forecasts
But it also involves certain guesswork and observations
11.5 Steps in Forecasting
Identifying and Understanding the Structure
There are almost indefinite factors that can affect the future of a business.
Identifying all these factors is neither possible nor desirable. So to make an
accurate forecast, the managers have to identify the factors on which to
focus. So internal and external factors must be studied to identify the
strategic factors of the business.

Forecasting the future

Now that the foundation is laid the next step is to make an accurate and
scientific forecast. This involves both scientific tools and techniques and
also professional judgment and observations. The forecast is not a
foolproof plan, only a guiding map for the future.

Analysis of Deviations
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No forecast will be completely accurate. The differences or deviations Business Forecasting
from the forecasts should be analyzed and studied. This will help in
NOTES
making more accurate forecasts in the future.

Adapting the Forecasts Procedure

In forecasting, the skill and professional judgement required are gained by
experiences and practice. The forecast process is fine-tuned with every
cycle. So we can learn from our mistakes and shortcomings and keep
improving on the forecasting procedures.
11.6 Methods of Business Forecasting
business forecasting. The methods are: 1. Bottom-up Method 2. Top-down
Method 3. Historical Method 4. Deductive Method 5. Joint Opinion
Method 6. Scientific Business Forecasting.

Business Forecasting: Method # 1.

Bottom-up Method:

Under this method various departments of an enterprise collect their own

information/data and prepare their own forecasts. On the basis of these
forecasts, the forecast for the firm as a whole is then undertaken. Thus, the
responsibility of successful forecasting lies directly with various
departments and people in the organisation.

Business Forecasting: Method # 2.

Top-down Method:

This method is just reverse of the direct or bottom-up method. In this

method the forecast for the industry/business as a whole is ascertained first
and then the particular forecasts for the various activities of the business
are established. The process of forecasting is, thus, indirect and the
responsibility for success in forecasting mainly lies with the top levels of
management.

Business Forecasting: Method # 3.

Historical Method:

This method refers to the projection of trends on the basis of past events.
The historical sequence of events is analysed as a basis for understanding
the present situation and forecasting the future trends. The past recurring
trends are associated with the corresponding cause and effect phenomenon
in the future.

The important advantages of this method include:

(i) The past information or records can be easily obtained; and

(ii) Present information is also not ignored.

However, the main limitation of this method is that the future trends may
deviate drastically from the normal path indicated by the past events.
Further, it may not be possible to find trend or develop correlation between
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 Business Forecasting cyclic movements of past data and other variables which have bearing
NOTES
upon them.
Business Forecasting: Method # 4.
Deductive Method:

Under this method future trends are based on observation and

investigation. In addition to the critical analysis of the past events to draw
future inferences, the subjective evaluation and conclusions for deducing
discretion, experience and intuition of the forecaster.

This method can be regarded as more dynamic in character as it takes into

consideration not only the historical sequence of events but also the latest
developments. However, the main drawback of this method is that it relies
more on individual judgement and initiative appraisal than on actual
record.

Business Forecasting: Method # 5.

Joint Opinion Method:
As the name suggests, this method utilises the collective opinion,
judgement and experience of various experts. A committee for business
forecasting is formulated to take the joint view of various members. An
attempt is made to evolve consensus for predicting future events on the
basis of their views.
The main advantages of this method include:
(i) It encourages co-operation and co-ordination and also utilises the
services of various experts;
(ii) There is no need of detailed statistical analysis, and
(iii) It is simple and easy to operate.
However, the main disadvantage of this method is the joint responsibility
which may ultimately result into no-body’s responsibility. The members of
the committee may also not take active interest as they know that their
judgement may not be finally accepted. This may degenerate the entire
forecasting process into a mere guess work.
Business Forecasting: Method # 6.
Scientific Business Forecasting:
Under this method, forecasting is done on scientific lines by making use of
various statistical tools, such as, business index or barometer, extrapolation
or mathematical projections, regression and econometric models. Past
statistical data modified in the light of changed present conditions provides
the basic raw material for drawing more accurate conclusions for the
future.
The following are some of the most important statistical tools used for
business forecasting:

(a) Business Index or Barometer.

(b) Extrapolation or Mathematical Projection.

(c) Regression
(d) Econometric Model.
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(a) Business Index or Barometer:
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 Business Forecasting
The term ‘business index’ refers to a series relating to business conditions.
NOTES
It is also known as ‘barometer’, ‘indicator’ or ‘economic forecaster.’ Such
a business index number may relate to general conditions of business or to
a particular trade or industry or to an individual business.

The index number may measure changes in business activity during the
changes of cyclical variations, i.e. boom, decline, depression and recovery.
It is called business barometer because it helps in making forecasts for
future business conditions.

The indices of production, wages, trade, finance, stocks and shares, etc. are
plotted on a graph paper to obtain the curve showing trend of long-period
and seasonal movements. The various index numbers relating to different
activities of business may be combined into a general or composite index
of business activity.’

This general index is an indicator of future conditions of trade and industry

in general. However, the behaviour of individual trade or industry might
show a different trend from that of general index, As such, the study of
general index should be supplemented by separate studies of individual
trade or industry.

The following are some of the important series which are considered by
businessmen for forecasting:

(i) Index of Wholesale Prices

(ii) Index of Consumer Prices

(iii) Index of Industrial Product

(iv) Gross National Product

(v) Employment

(vi) General Aggregate Consumption

(vii) Volume of Agricultural Production

(viii) Stock Exchange Index.

The different figures may be converted into relatives on a certain base. The
weighted average of these relatives may be computed to ascertain the
business index called the barometer.

These business barometers guide the businessmen in taking decisions on

many problems like expansion of production activity, diversification,
undertaking of a new project, exploring new markets, launching as sales
campaign rising of funds through issue of shares or debentures etc.

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 Business Forecasting The reports on general business and trade conditions are published by the
NOTES
Chamber of Commerce, industry and some trade associations. Important
journals and newspapers also publish index numbers relating to various
industries and trades. The Reserve Bank of India also publishes various
index numbers and indicators of general economic conditions.

The business barometers are very useful in business forecasting, but

sometimes these barometers give misleading conclusions due to inaccurate
construction of index numbers or changed conditions. As many factors
may prevent history to repeat it, it is necessary to modify the trend revealed
by business barometers in the light of specific conditions influencing the
judgement.

(b) Extrapolation or Mathematical Projection:

Extrapolation is the process of estimating a value for some future period,

based on some assumptions.

The basic assumptions underlying this statistical tool of business

forecasting include:

(i) There should not be sudden jumps in figures from one period to another;
and

(ii) The conditions in the future will not change materially.

(c) Regression:

The regression equation, y=a+bx, can be used as an instrument to predict

the value of y for a given value of x. The regression equation is highly used
in physical sciences where the data are related functionally. However, in
business forecasting it may be very difficult to establish functional
relationships and hence the use of regression equation is also limited.

(d) Econometric Models:

Economic activities describe in terms of mathematical equations are

referred to as econometric models. These models show the way of inter-
relationships amongst the various aspects of the economy. The econometric
models are not very popular because it is not possible for every business to
develop his own model of the economy.

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 UNIT – XII TIME SERIES ANALYSIS Time Series Analysis

NOTES
Structure

12.1 Introduction
12.2 Regression analysis
12.3 Exponential Smoothing Method
12.4 Theories of Business Forecasting:
12.5 Theory of Economic Rhythm
12.6 Action and Reaction Approach
12.7 Sequence Method or Time Lag Method
12.8 Specific Historical Analogy
12.9 Cross-Cut Analysis
12.10 Model Building Approach
12.11 Utility of Business Forecasting
12.12 Limitations of Business Forecasting
12.13 Business Forecasting: Advantage

12.1 Introduction
A series of observations, on a variable, recorded after successive intervals
of time is called a time series. The successive intervals are usually equal
time intervals, e.g., it can be 10 years, a year, a quarter, a month, a week, a
day, and an hour, etc. The data on the population of India is a time series
data where time interval between two successive figures is 10 years.
Similarly figures of national income, agricultural and industrial production,
etc., are available on yearly basis.
12.2 Regression analysis
The main objective of regression analysis is to know the nature of
relationship between two variables and to use it for predicting the most
likely value of the dependent variable corresponding to a given, known
value of the independent variable. This can be done by substituting in
Eq.(5.1a) any known value of X corresponding to which the most likely
estimate of Y is to be found.

For example, the estimate of Y (i.e. Yc), corresponding to X = 15 is

Yc = 8.61 + 0.71(15)

8.61 + 10.65
19.26
It may be appreciated that an estimate of Y derived from a regression
equation will not be exactly the same as the Y value which may actually be
observed. The difference between estimated Yc values and the
corresponding observed Y values will depend on the extent of scatter of
various points around the line of best fit.

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 Time Series Analysis loser the various paired sample points (Y, X) clustered around the line of
NOTES best fit, the smaller the difference between the estimated Yc and observed Y
values, and vice-versa. On the whole, the lesser the scatter of the various
points around, and the lesser the vertical distance by which these deviate
from the line of best fit, the more likely it is that an estimated Yc value is
close to the corresponding observed Y value.

12.3 Exponential Smoothing Method

The exponential smoothing method also facilities continuous
updating of the estimate of MAD. The current MADt is given by
MADt = α Actual values- Forecasted values + (1-α) MADt-1

Higher values of smoothing constant α make the current MAD more

responsive to current forecast errors.

Example 7.7: A firm uses simple exponential smoothing with α =0.1 to

forecast demand. The forecast for the week of February 1 was 500 units
whereas actual demand turned out to be 450 units.

Forecast the demand for the week of February 8.

Assume the actual demand during the week of February 8 turned out
to be 505 units. Forecast the demand for the week of February 15.
Continue forecasting through March 15, assuming that subsequent
demands were actually 516, 488, 467, 554 and 510 units. Solution:
Given Ft-1 = 500, D t-1 = 450, and α = 0.1
Ft = F t-1 – α(Dt-1 - Ft-1) = 500 + 0.1(450-500) = 495 units

Forecast of demand for the week of February 15 is shown in Table 7.5

Table 7.5: Forecast of Demand
New
Forecast
Week Demand Old Forecast Correction (Ft)

Ft-1 +α(Dt-
Dt-1 Forecast Error α(Dt-1 -Ft-1) 1-Ft-1)

Ft-1 (Dt-1 –Ft-1)

Feb. 1 450 500 -50 -5 495

Feb. 8 505 495 10 1 496

Feb. 15 516 496 20 2 498

Feb. 22 488 498 -10 -1 497

Mar. 1 467 497 -30 -3 494

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Mar. 8 554 494 60 6 500

Mar. 15 510 500 10 1 501

 If no previous forecast value is known, the old forecast starting point Time Series Analysis
may be estimated or taken to be an average of some preceding
NOTES
periods.

The estimated Yc values will coincide the observed Y values only when all
the points on the scatter diagram fall in a straight line. If this were to be so,
the sales for a given marketing expenditure could have been estimated with
l00 percent accuracy. But such a situation is too rare to obtain. Since some
of the points must lie above and some below the straight line, perfect
prediction is practically non-existent in the case of most business and
economic situations.
This means that the estimated values of one variable based on the known
values of the other variable are always bound to differ. The smaller the
difference, the greater the precision of the estimate, and vice-versa.
Accordingly, the preciseness of an estimate can be obtained only through a
measure of the magnitude of error in the estimates, called the error of
estimate.

12.4 Theories of Business Forecasting:

 Theory of Economic Rhythm
 Action and Reaction Approach
 Sequence Method or Time Lag Method
 Specific Historical Analogy
 Cross-Cut Analysis
 Model Building Approach
Business Forecasting: Theory # 1.
12.5 Theory of Economic Rhythm:
This theory propounds that the economic phenomena behave in a rhythmic
manner and cycles of nearly the same intensity and duration tend to recur.
According to this theory, the available historical data have to be analysed
into their components, i.e. trend, seasonal, cyclical and irregular variations.
The secular trend obtained from the historical data is projected a number of
years into the future on a graph or with the help of mathematical trend
equations. If the phenomena is cyclical in behaviour, the trend should be
adjusted for cyclical movements.
When the forecast for a year is to be split into months or quarters then the
forecaster should adjust the projected figures for seasonal variations also
with the help of seasonal indices.
It becomes difficult to predict irregular variations and hence, rhythm
method should be used along with other methods to avoid inaccuracy in
forecasts. However, it must be remembered that business cycles may not be
strictly periodic and the very assumptions of this theory may not be true as
history may not repeat.

Business Forecasting: Theory # 2.

12.6 Action and Reaction Approach:
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 Time Series Analysis This theory is based on the Newton‟s „Third Law of Motion‟, i.e., for every
NOTES
action there is an equal and opposite reaction. When we apply this law to
business, it implies that it there if depression in a particular field of
business, there is bound to be boom in it sooner or later. It reminds us of
the business, cycle which has four phases, i.e., prosperity, decline,
depression and prosperity.
This theory regards a certain level of business activity as normal and the
forecaster has to estimate the normal level carefully. According to this
theory, if the price of commodity goes beyond the normal level, it must
come down also below the normal level because of the increased
production and supply of that commodity.
Business Forecasting: Theory # 3.
12.7 Sequence Method or Time Lag Method:
This theory is based on the behaviour of different businesses which show
similar movements occurring successively but not simultaneously. As such,
this method takes into account time lag based on the theory of lead-lag
relationship which holds good in most cases.
The series that usually change earlier serve as forecast for other related
series. However, the accuracy of forecasts under this method depends upon
the accuracy with which time lag is estimated.
Business Forecasting: Theory # 4.
12.8 Specific Historical Analogy:
This theory is based on the assumption that history repeats itself. It simply
implies that whatever happened in the past under a set of circumstances is
likely to happen in future under the same set of conditions.
Thus, a forecaster has to analyse the past data to select such period whose
conditions are similar to the period of forecasting. Further, while predicting
for the future, some adjustments may be made for the special
circumstances which prevail at the time of making the forecasts.
Business Forecasting: Theory # 5.
12.9 Cross-Cut Analysis:
In this method of business forecasting, the combined effect of various
factors is not studied, but the effect of each factor, that has a bearing on the
forecast, is studied independently. This theory is similar to the Analysis of
Time Series under the statistical methods.
Business Forecasting: Theory # 6.
12.10 Model Building Approach:
This approach makes use of mathematical equations for drawing economic
models. These models depict the inter-relationships amongst the various
factors affecting the economy or business. The expected values for
dependent variables are then ascertained by putting the values of known
variables in the model. This approach is highly mechanical and this can be
rarely employed in business conditions.
12.11 Utility of Business Forecasting
Self-Instructional Material Meaning and Definition:Business forecasting is an act of predicting the
future economic conditions on the basis of past and present information. It
refers to the technique of taking a prospective view of things likely to
shape the turn of things in foreseeable future. As future is always uncertain,
there is a need of organised system of forecasting in a business.Thus, Time Series Analysis
scientific business forecasting involves:
NOTES
(i) Analysis of the past economic conditions and

(ii) Analysis of the present economic conditions; so as to predict the future

course of events accurately.

In this regard, business forecasting refers to the analysis of the past and
present economic conditions with the object of drawing inferences about
the future business conditions. In the words of Allen, “Forecasting is a
systematic attempt to probe the future by inference from known facts. The
purpose is to provide management with information on which it can base
planning decisions.

Leo Barnes observes, “Business Forecasting is the calculation of

reasonable probabilities about the future, based on the analysis of all the
latest relevant information by tested and logically sound statistical
econometric techniques, as interpreted, modified and applied in terms of an
executive‟s personal judgment and social knowledge of his own business
and his own industry or trade”.
In the words of C.E. Sulton, “Business Forecasting is the calculation of
probable events, to provide against the future. It therefore, involves a „look
ahead‟ in business and an idea of predetermination of events and their
financial implications as in the case of budgeting.”

According to John G. Glover, “Business Forecasting is the research

procedure to discover those economic, social and financial influences
governing business activity, so as to predict or estimate current and future
trends or forces which may have a bearing on company policies or future
financial, production and marketing operations.”

The essence of all the above definitions is that business forecasting is a

technique to analyse the economic, social and financial forces affecting the
business with an object of predicting future events on the basis of past and
present information.
Steps of Forecasting:
The process of forecasting consists of the following steps, also described as
elements of forecasting:
1. Developing the Basis:
The first step involved in forecasting is developing the basis of systematic
investigation of economic situation, position of industry and products. The
future estimates of sales and general business operations have to be based
on the results of such investigation. The general economic forecast marks
as the primary step in the forecasting process.
2. Estimating Future Business Operations:
The second step involves the estimation of conditions and course of future
events within the industry. On the basis of information/data collected
through investigation, future business operations are estimated. The
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 Time Series Analysis quantitative estimates for future scale of operations are made on the basis
NOTES
of certain assumptions.
3. Regulating Forecasts:
The forecasts are compared with actual results so as to determine any
deviations. The reasons for his variations are ascertained so that corrective
action is taken in future.
4. Reviewing the Forecasting Process:
Once the deviations in forecasts and actual performance are found then
improvements can be made in the process of forecasting. The refining of
forecasting process will improve forecasts in future.
Sources of Data Used In Business Forecasting:
Collection of data is a first step in any statistical investigation. It is the
basis for any analysis and interpretations. Before collection of data, many
questions shall occupy the mind of the manager. The manager must be able
to answer these questions before task of collection is started.
12.12 Limitations of Business Forecasting:
Inspite of many advantages, some people regard business forecasting “as
an unnecessary mental gymnastics and reject it as a sheer waste of time,
money and energy.”

The reason for the same lies in the fact that despite all precautions, an
element of error is bound to creep in the forecasts and we cannot eliminate
guesswork in forecasts. It is also felt that forecasting is influenced by the
pessimistic or optimistic attitude of the forecaster.

It may not be possible to make forecasts with a pin-point accuracy. But, it

still cannot undermine the importance of business forecasting. The
management should first make use of statistical and econometric models in
making forecasts and then apply collective experience, skill and objective
judgement in evaluating the forecasts.

12.13 Business Forecasting: Advantage

Business Forecasting: Advantage # 1. Establishing a New Business:
While setting up a new business, a number of business forecasts are
required. One has to forecast the demand for the product, capacity of
competitors, expected share in the market, the amount and sources of
raising finances, etc.

The success of a new business will depend upon the accuracy of such
forecasts. If the forecasts are made systematically, then the operations of
the business will go smoothly and the chances of failure will be minimised.

Business Forecasting: Advantage # 2. Formulating Plans:

Forecasting provides a logical basis for preparing plans. It plays a major
role in managerial planning and supplies the necessary information. The
future assessment of various factors is essential for preparing plans. In fact,
planning without forecasting is an impossibility. Henry Fayol has rightly
Self-Instructional Material observed that the entire plan of an enterprise is made up of a series of plans
called forecasts.

Business Forecasting: Advantage # 3. Estimating Financial Needs:

Every business needs adequate capital. In the absence of correct estimates Time Series Analysis
of financial requirements, the business may suffer either from inadequate
NOTES
or from excess capital. Forecasting of sales and expenses helps in
estimating future financial needs.

The plans for expansion, diversification or improvement also necessitate

the forecasting of requirements of funds. A proper financial planning
depends upon systematic forecasting.

Business Forecasting: Advantage # 4. Facilitating Managerial Decisions:

Forecasting helps management to take correct decisions. By providing a
logical basis for planning and determining in advance the nature of future
business operations, it facilitates correct managerial decisions about
material, personnel, sales and other requirements.

Business Forecasting: Advantage # 5. Quality of Management:

It improves the quality of managerial personnel by compelling them to
look into the future and make provision for the same. By focussing
attention on future, forecasting helps the management in adopting a
definite course of action and a set purpose.

Business Forecasting: Advantage # 6. Encourages Co-operation and co-

ordination:
Forecasting calls for some minimum effort on the part of all and. thus,
creates a sense of participation. It is not a one man‟s or one department‟s
job. No department or person can make its forecasts in isolation. There
should be a proper co-operation and co-ordination among different
departments for setting proper forecasts for the business as a whole.

So, forecasting process leads to better co-operation and co-ordination

among people of various departments of the organisation.

Business Forecasting: Advantage # 7. Better Utilisation of Resources:

Forecasting ensures better utilisation of resources by revealing the areas of
weaknesses and providing necessary information about the future.
Management can concentrate on critical areas and control more effectively.

Business Forecasting: Advantage # 8. Success in Business:

Success in business, to a great extent, depends upon correct predictions
about the future. Systematic forecasting ensures smooth and continuous
working of the business. By knowing the future course of events in
advance, one could always face the difficulties in a planned manner.

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Analysis of Time Series
UNIT XIII - ANALYSIS OF TIME
NOTES SERIES
Structure
13.0 Introduction
13.1 Objectives
13.2 Time series Analysis
13.2.1 Components of time series
13.2.2 Analysis of Time Series
13.3 Measurement of trends
13.3.1Moving average method
13.3.2 Least square method
13.4 Measurement of seasonal variation
13.4.1 Methods of constructing seasonal indices
13.5 Forecasting
13.6 Deseasonalisation
13.7 Summary
13.8 Key Words
13.9 Answers to Check Your Progress
13.10 Questions and Exercise
13.11 Further Readings
13.0 INTRODUCTION
When quantitative data are arranged in the order of their
occurrence, the resulting statistical series is called a time series. The
quantitative values are usually recorded over equal time interval daily,
weekly, monthly, quarterly, half yearly, yearly, or any other time
measure. Monthly statistics of Industrial Production in India, Annual
birth-rate figures for the entire world, yield on ordinary shares, weekly
wholesale price of rice, and daily records of tea sales or census data are
some of the examples of time series. Each has a common characteristic of
recording magnitudes that vary with passage of time. In this unit we will
see about time series analysis.
13.1 OBJECTIVES
After going through this unit, you will
 Learn about time series analysis
 Know about the measurement of trends
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 Analysis of Time Series
 Understand forecasting and Deseasonalisation
NOTES
13.2 TIME SERIES ANALYSIS
Time series are influenced by a variety of forces. Some are continuously
effective other make themselves felt at recurring time intervals, and still
others are non-recurring or random in nature. Therefore, the first task is
to break down the data and study each of these influences in isolation.
This is known as decomposition of the time series. It enables us to
understand fully the nature of the forces at work. We can then analysis
their combined interactions. Such a study is known as time-series
analysis.
13.2.1 COMPONENTS OF TIME SERIES:
The factors that are responsible for bringing about changes in a
time series, also called the components of time series, are as follows:
 Secular Trends (or General Trends)
 Seasonal Movements
 Cyclical Movements
 Irregular Fluctuations
Secular Trends:
Secular trend is the main component of a time series which results
from long term effects of socio-economic and political factors. It shows
the growth or decline in a time series over a long period. It is the type of
tendency which continues to persist for a very long period. Prices and
export and import data, for example, reflect obviously increasing
tendencies over time.
Seasonal Trends:
Seasonal trends are short term movements occurring in data due
to seasonal factors. The short term is generally considered as a period in
which changes occur in a time series with variations in weather or
festivities. For example, it is commonly observed that the consumption of
ice-cream during summer is generally high and hence an ice-cream
dealer's sales would be higher in some months of the year while
relatively lower during winter months. Employment, output, exports, etc.,
are subject to change due to variations in weather. Similarly, the sale of
garments, umbrellas, greeting cards and fire-works are subject to large
variations during festivals like Valentine’s Day, Eid, Christmas, New
Year's, etc. These types of variations in a time series are isolated only
when the series is provided biannually, quarterly or monthly.
Cyclic Movements
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It is a long term oscillations occurring in a time series. These

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Analysis of Time Series oscillations are mostly observed in economics data and the periods of
such oscillations are generally extended from five to twelve years or
NOTES more. These oscillations are associated with the well known business
cycles. These cyclic movements can be studied provided a long series of
measurements, free from irregular fluctuations, is available.
Irregular Fluctuations
It happens when a sudden changes occurring in a time series
which are unlikely to be repeated. They are components of a time series
which cannot be explained by trends, seasonal or cyclic movements.
These variations are sometimes called residual or random components.
These variations, though accidental in nature, can cause a continual
change in the trends, seasonal and cyclical oscillations during the
forthcoming period. Floods, fires, earthquakes, revolutions, epidemic,
strikes etc., are the root causes of such irregularities.
13.2.2 ANALYSIS OF TIME SERIES
The objective of the time series analysis is to identify the
magnitude and direction of trends, to estimate the effect of seasonal and
cyclical variations and to estimate the size of the residual component.
This implies the decomposition of a time series into its several
components. Two lines of approach are usually adopted in analyzing a
given time series:
 The additive model
 The multiplicative model

The additive model:

It is used when the four components of a time series are
independent of one another. Independent means the magnitude and
patterns of movement of the components do not affect each other. Using
this assumption the magnitudes of the time series are regarded as the sum
of separate influences of its four components. In additive approach, the
unit of measurements remains the same for all the four components. The
additive model can be written as
Y=T+S+C+R
Where Y = magnitude of a time series
T = Trend,
C =Cyclical component,
S =Seasonal component,
R = Random component.
The multiplicative model:
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It is used where the forces giving rise to the four types of
168
variations are interdependent. The magnitude of time series is the product Analysis of Time Series
of four components. Then the multiplicative model can be written as
NOTES
Y=T×S×C×R
The additive model is usually used when the time series is spread
over a short time span or where the rate of growth or decline in the trend
is small. The multiplicative model, which is used more often than the
additive model, is generally used whenever the time span of the series is
large or the rate of growth or decline is
𝐘
Y – T = S + C + R or = S×C×R
𝐓

Similarly, a de-trended, de-seasonalized series may be obtained as

𝒀
Y–T–S=C+R or = C × R
𝑻𝒙𝑺

It is not always necessary for the time series to include all four
types of variations; rather, one or more of these components might be
missing altogether. For example, when using annual data the seasonal
component may be ignored, while in a time series of a short span having
monthly or quarterly observations, the cyclical component may be
ignored
13.3 MEASUREMENT OF TRENDS
 Moving average method
 Least square method
13.3.1 MOVING AVERAGE METHOD
Moving average method is a simple device of reducing
fluctuations and obtaining rend values with a fair degree of accuracy. In
this method the average value of a number of years (months, weeks, or
days) is taken as the trend value for the middle point of the period of
moving average. The process of averaging smoothes the curve and
reduces the fluctuations.
The first thing to be decided in this method is the period of the
moving average. What it means is to take a decision about the number of
consecutive items whose average would be calculated each time.
Suppose it has been decided that the period of the moving average would
be 5 years (months, weeks, or days) then the arithmetic average of the
first 2 items (number 1,2,34 and 5) would be placed against item no:3
and then the arithmetic average of item Nos:2,3,4,5 and 6would be
placed against item No: 4. This process would be repeated till the
arithmetic average of the last five items has been calculated.
Odd Period of Moving Average
Calculation of three yearly moving averages includes the following steps
1. Add up the values of the first 3 years and place the yearly sum
against the median year. (This sum is called moving total) Self-Instructional Material

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Analysis of Time Series 2. Leave the first year value, add up the values of the next three
years and place it against its median year.
NOTES 3. This process must be continued till all the values of the data are
taken for calculation.
4. Each 3-yearly moving total must be divided by 3 to get the 3-year
moving averages, which is our required trend value.
The formula calculating 3 yearly moving averages is as follows
𝑎 +𝑏+𝑐 𝑏+𝑐+𝑑 𝑐+𝑑 +𝑒
, ,
3 3 3

The formula calculating 5 yearly moving averages is as follows

𝑎 +𝑏+𝑐+𝑑 +𝑒 𝑏+𝑐+𝑑 +𝑒+𝑓 𝑐+𝑑+𝑒+𝑓+𝑔
, , …….
5 5 5

Example:
Calculate the 3 yearly and 5 yearly moving averages of the data

Years 1 2 3 4 5 6 7 8 9 10 11 12

sales 5.2 4. 5. 4. 5. 5. 5. 5. 5. 6.0 5. 4.

9 5 9 2 7 4 8 9 0 2 8

Solution:
Year Sales 3 Year 3 Year 5 Year 5 Year
Moving Moving Moving Moving
Total Average Total Average
(3) / 3 (4) / 5
1 5.2 --- -- --
2 4.9 15.6 5.2 -- --
3 5.5 15.3 5.1 25.7 5.14
4 4.9 15.6 5.2 26.2 5.24
5 5.2 15.8 5.27 26.7 5.34
6 5.7 16.3 5.41 27.0 5.4
7 5.4 16.9 5.63 28.0 5.6
8 5.8 17.1 5.7 28.8 5.76
9 5.9 17.7 5.23 28.3 5.66
10 6.0 17.1 5.7 27.7 5.54
11 5.2 16.0 5.33 --- ---
12 4.8 --- --- --- ---
Even Period of Moving Average:
The period of moving average is 4,6, or 8, it is even number. The
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170
between the second and the third year. So the total should be placed in Analysis of Time Series
between the 2nd and 3rd years. We must centre the moving average in
order to place the moving average against the year NOTES
Steps to find even period of moving average:
1. Add up the values of the first 4 years and place the sum against
the middle of 2nd and 3rd year. (This sum is called 4 year moving
total)
2. Leave the first year value and add next 4 values from the 2nd year
onward and write the sum against its middle position.
3. This process must be continued till the value of the last item is
taken into account.
4. Add the first two 4-years moving total and write the sum against
3rd year.
5. Leave the first 4-year moving total and add the next two 4-year
moving total and place it against 4th year.
6. This process must be continued till all the 4-yearly moving totals
are summed up and centered.
7. Divide the 4-years moving total by 8 to get the moving averages
which are our required trend values
Example:
Find the 4 yearly moving average foe determining trend values in the
following time series data

Year 2005 2006 2007 2008 2009 2010 2011

Profit in(000) ₹ 12 14 16 15 13 14 18

Solution:
Years Profit Sum of 4 years Moving 4 yearly Moving
Fours Average Average Centered
2005 12
2006 14
57 14.25 (14.25 + 14.50)/ 2 =
14.38
2007 16
58 14.50 (14.50 + 14.50)/ 2 =
14.50
2008 15 Self-Instructional Material

58 14.50 (14.50 + 15.00)/ 2 =

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Analysis of Time Series 14.75
2009 13
NOTES 60 15.00
2010 14

2011 18
Advantages
Moving averages can be used for measuring the trend of any
series. This method is applicable to linear as well as non-linear trends.
Disadvantages
The trend obtained by moving averages generally is neither a
straight line nor a standard curve. For this reason the trend cannot be
extended for forecasting future values. Trend values are not available for
some periods at the start and some values at the end of the time series.
This method is not applicable to short time series
13.3.2 LEAST SQUARES METHOD
When the trend is linear the trend equation may be represented by
y = a + bt and the values of a and b for the line y = a + bt which
minimizes the sum of squares of the vertical deviations of the actual
(observed) values from the straight line, are the solutions to the so called
normal equations:
Ʃy = na + bƩt …………….. (1)
Ʃyt = aƩt + bƩt2 ………….(2)
Where n is the number of paired observations
The normal equation are obtained by multiplying y = a + bt, by
the coefficient of a and b, i.e., by 1 and t throughout and summing up.
When the Number of Years is Odd
We can use this method when we are given odd number of years. It is
easy and is widely used in practice. If the number of items is odd, we
can follow the following steps:
1. Denote time as the t variable and values as y
2. Middle year is assumed as the period of origin and find out
deviations
3. Square the time deviations and find t 2.
4. Multiply the given value of y by the respective deviation of t and
find the total Ʃty.
5. Find out the values of y; get Ʃy
6. The value so obtained are placed in the two quations
i. Ʃy = na + bƩt
Self-Instructional Material ii. Ʃyt = aƩt + bƩt2; find out the value of a and b
7. The calculated values of a and b are substituted and the trend
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 value of y are found for various values of t. Analysis of Time Series

When the number of years is odd the calculation will be simplified by NOTES
taking the mid year as origin and one year as unit and in that case
Ʃt = 0 and the two normal equations take the form
Ʃy = na ; Ʃyt = bƩt2
Ʃ𝐲 Ʃ𝐲𝐭
Hence a = ,b=
𝑛 Ʃ𝐭²

Example :
Calculate trend values by the method of least square from data given
below and estimate the sales for 2003

Years: 1996 1997 1998 1999 2000

Sales of Co.A, (₹ Lakhs) 70 74 80 86 90

Solution:

Year Sales Deviation from 1998

y t ty t2

1996 70 -2 -140 4

1997 74 -1 -74 1

1998 80 0 0 0

1999 86 1 86 1

2000 90 2 180 4

n=5 Ʃy = 400 Ʃt = 0 Ʃty = 52 Ʃt2 = 10

Since Ʃt = 0
Ʃ𝐲 400 Ʃ𝐲𝐭 52
a= = = 80 , b = = 𝟏𝟎 = 5.2
𝑛 5 Ʃ𝐭²

Hence, y = 80 + 5.2 x t
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Therefore y1996 = 80 + 5.2 ( - 2) = 80 – 10.4 = 69.6
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Analysis of Time Series y1997 = 80 + 5.2 ( -1) = 80 – 5.2 = 74.8
y1998 = 80 + 5.2 ( 0 ) = 80 + 0 = 80
NOTES
y1996 = 80 + 5.2 ( 1) = 80 + 5.2 = 85.2
y1996 = 80 + 5.2 ( 2) = 80 + 10.4 = 90.4
For 2003, t will be 5. Putting t = 5 in the equation
Y2013 = 80 + 5.2 (5\0 = 80 + 26 = 106
Thus the estimated sales for the year 2003 is ₹106 lakhs
When the Number of Years is Even
When the number of years is even the origin is placed in the midway
between the two middle years and the unit is taken to be half year instead
of one year. With this change of origin and scale we have
Ʃt = 0
Ʃ𝐲 Ʃ𝐲𝐭
Hence a = ,b=
𝑛 Ʃ𝐭²

Example:
Production of a company for 6 consecutive years is given in the
following table. Calculate the trend value by using the method of least
square

Year 2000 2001 2002 2003 2004 2005

Production 12 13 18 20 24 28

Solution:

Year Sales Deviation from 2002.5 Trend values

y t ty t2

2000 12 -2.5 -30 6.25 11.5

2001 13 -1.5 -19.5 2.25 14.5

2002 18 -0.5 -9 0.25 17.53

2003 20 0.5 10 0.25 20.81

2004 24 1.5 36 2.25 24.09

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 Analysis of Time Series
2005 28 2.5 70 6.25 27.37
NOTES
2
n = 6 Ʃy = 115 Ʃt = 0 Ʃty = 57.5 Ʃt = 17.5

Since t = 0
Ʃ𝐲 115 Ʃ𝐲𝐭 57.5
a= = = 19.17 , b = = 17.5 = 3.28
𝑛 6 Ʃ𝐭²

Hence, y = 19.17 + 3.28 x t

Therefore y2000 = 19.17 + 3.28 (- 2.5) = 19.17 – 8.2 = 11.5
y2001 = 19.17 + 3.28 (- 1.5) = 19.17 – 4.92 = 14.5
y2002 = 19.17 + 3.28 (- 0.5) = 19.17 – 1.64 = 17.53
y2003 = 19.17 + 3.28 (0.5) = 19.17 + 1.64 = 20.81
y2004 = 19.17 + 3.28 (1.5) = 19.17 + 4.92 = 24.09
y2005 = 19.17 + 3.28 (2.5) = 19.17 + 8.2 = 27.37
Merits
1. The method is mathematically sound.
2. The estimates a and b are unbiased.
3. The least square method gives trend values for all the years and
the method is devoid of all kinds of subjectivity.
4. The algebraic sum of deviations of actual values from trend
values is zero and the sum of the deviations is minimum.
Demerits
1. The least square method is highly mathematical; therefore, it is
difficult for a layman to understand it.
2. The method is not flexible.
3. It has been assumed that y is only a linear function of time period
n. This may not be true in any situations.
13.4 MEASUREMENT OF SEASONAL VARIATION
Seasonal variations are that rhythmic changes in the time series
data that is regular and periodic variations having a period of one year
duration. Some of the examples which show seasonal variations are
production of cold drinks, which are high during summer months and
low during winter season. Sales of sarees in a cloth store which are high
during festival season and low during other periods. They have their
origin in climatic or institutional factors that affect either supply or
demand or both. It is important that these variations should be measured
accurately. The reason for determining seasonal variations in a time
series is to isolate it and to study its effect on the size of the variable in
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the index form which is usually referred as seasonal index.

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Analysis of Time Series 13.4.1 METHODS OF CONSTRUCTING SEASONAL INDICES
NOTES There are four methods of constructing seasonal indices.
1. Simple averages method
2. Ratio to trend method
3. Percentage moving average method
4. Link relatives method
Simple Average Method :
The time series data for each of the 4 seasons (for quarterly data)
of a particular year are expressed as percentages to the seasonal average
for that year. The percentages for different seasons are averaged over the
years by using simple average. The resulting percentages for each of the
4 seasons then constitute the required seasonal indices.
Steps to calculate Simple Average Method:
(i) Arrange the data by months, quarters or years according to the data
given.
(ii) Find the sum of the each months, quarters or year.
(iii) Find the average of each months, quarters or year.
(iv) Find the average of averages, and it is called Grand Average (G)
(v) Compute Seasonal Index for every season (i.e) months, quarters or
year is given by
𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝐴𝑣𝑒𝑟𝑎𝑔𝑒
Seasonal Index (S.I) = × 100
𝐺𝑟𝑎𝑛𝑑𝑎𝑣𝑒𝑟𝑎𝑔𝑒

If the data is given in months

monthly 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 ( 𝑓𝑜𝑟𝑗𝑎𝑛 )
Seasonal Index for Jan (S.I) = × 100
𝐺𝑟𝑎𝑛𝑑𝑎𝑣𝑒𝑟𝑎𝑔𝑒
monthly 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 ( 𝑓𝑜𝑟𝑓𝑒𝑏 )
Seasonal Index for Feb (S.I) = × 100
𝐺𝑟𝑎𝑛𝑑𝑎𝑣𝑒𝑟𝑎𝑔𝑒

Similarly we can calculate SI for all other months

Example:
Calculate the seasonal index for the quarterly production of a computer
using method of simple average

Year I Quarter II Quarter III Quarter IV Quarter

2011 355 451 525 500

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 Analysis of Time Series
2012 369 410 496 510
NOTES
2013 391 432 458 495

2014 298 389 410 457

2015 300 390 431 459

2016 350 400 450 500

Solution:

Year I Quarter II Quarter III Quarter IV Quarter

2011 355 451 525 500

2012 369 410 496 510

2013 391 432 458 495

2014 298 389 410 457

2015 300 390 431 459

2016 350 400 450 500

Quarterly Total 2063 2472 2770 2921

Quarterly Averages 343.83 412 461.67 486.83

𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝐴𝑣𝑒𝑟𝑎𝑔𝑒
Seasonal Index (S.I) = × 100
𝐺𝑟𝑎𝑛𝑑𝐴𝑣𝑒𝑟𝑎𝑔𝑒
343 .83 + 412 + 461 .67+ 486 .83 1704 .33
Grand average = = = 426.0825
4 4

343 .83
S.I for I Q = × 100 = 80.69
426 .0825

412 Self-Instructional Material

S.I for II Q = × 100 = 96.69
426 .0825

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Analysis of Time Series
461 .67
NOTES S.I for III Q = × 100 = 108.35
426 .0825

486 .83
S.I for IV Q = × 100 = 114.26
426 .0825

Advantage and Disadvantage:

 Method of simple average is easy and simple to execute.
 This method is based on the basic assumption that the data do not
contain any trend and cyclic components. Since most of the
economic and business time series have trends and as such this
method though simple is not of much practical utility.

CHECK YOUR PROGRESS - 1

1. A time series is a set of data recorded_____________
2. The terms prosperity, recession, depression and recovery are in
particular attached to ________
3. What is time series?

13.5 FORECASTING
Time series forecasting methods produce forecasts based solely on
historical values and they are widely used in business situations where
forecasts of a year or less are required. These methods used are
particularly suited to Sales, Marketing, Finance, Production planning etc.
and they have the advantage of relative simplicity. Time series
forecasting is a technique for the prediction of events through a sequence
of time.
The technique is used across many fields of study, from geology to
economics. The techniques predict future events by analyzing the trends
of the past on the assumption that future trends will hold similar to
historical trends. Data is organized around relatively deterministic
timestamps, and therefore, compared to random samples, may contain
additional information that is tried to extract.
 Time series methods are better suited for short-term forecasts
(i.e., less than a year).
 Time series forecasting relies on sufficient past data being
available and that the data is of a high quality and truly
representative.
 Time series methods are best suited to relatively stable situations.
Where substantial fluctuations are common and underlying
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178
 methods may give relatively poor results. Analysis of Time Series

Advantages of forecasting: NOTES

1. Helps to predict the future:
2. Learns from the past
3. Remain competitive
4. Prepare for new business
Disadvantages of forecasting:
1. Basis of forecasting
2. Reliability of past data
3. Time and cost factor
13.6 DESEASONALISATION
When the seasonal component is removed from the original data,
the reduced data are free from seasonal variations and is called
deseasonalised data. That is, under a multiplicative model
𝐓𝐱𝐒𝐱𝐂𝐱𝐈
=TxCxI
𝐒

Deseasonalised data being free from the seasonal impact manifest only
average valueof data.
Seasonal adjustment can be made by dividing the original data by the
seasonal index.

𝑶𝑹𝑰𝑮𝑰𝑵𝑨𝑳𝑫𝑨𝑻𝑨
Deseasonalised data = 𝑺𝑬𝑨𝑺𝑶𝑵𝑨𝑳𝑰𝑵𝑫𝑬𝑿 𝑿 𝟏𝟎𝟎
where an adjustment-multiplier 100 is necessary because the seasonal
indices are usually given in percentages.
In case of additive model
Yt = T + S + C + I
𝒔𝒆𝒂𝒔𝒐𝒏𝒂𝒍𝒊𝒏𝒅𝒆𝒙
Deseasonalised data = 𝒐𝒓𝒊𝒈𝒊𝒏𝒂𝒍𝒅𝒂𝒕𝒂 − 𝟏𝟎𝟎
𝒔𝒆𝒂𝒔𝒐𝒏𝒂𝒍𝒊𝒏𝒅𝒆𝒙
= 𝐘𝐭 − 𝟏𝟎𝟎

CHECK YOUR PROGRESS - 2

4. Define forecasting?
5. What are the method used for finding seasonal indices

13.7 SUMMARY
 Time series are influenced by a variety of forces. Some are Self-Instructional Material
continuously effective other make themselves felt at recurring
179
Analysis of Time Series time intervals, and still others are non-recurring or random in
nature. Therefore, the first task is to break down the data and
NOTES study each of these influences in isolation. This is known as
decomposition of the time series.
 The objective of the time series analysis is to identify the
magnitude and direction of trends, to estimate the effect of
seasonal and cyclical variations and to estimate the size of the
residual component. This implies the decomposition of a time
series into its several components. Two lines of approach are
usually adopted in analyzing a given time series:

o The additive model, the multiplicative model

 Moving average method is a simple device of reducing

fluctuations and obtaining rend values with a fair degree of
accuracy. In this method the average value of a number of years
(months, weeks, or days) is taken as the trend value for the
middle point of the period of moving average. The process of
averaging smoothes the curve and reduces the fluctuations.
 When the trend is linear the trend equation may be represented by
y = a + bt and the values of a and b for the line y = a + bt which
minimizes the sum of squares of the vertical deviations of the
actual (observed) values from the straight line, are the solutions to
the so called normal equations:
 Seasonal variations are that rhythmic changes in the time series
data that is regular and periodic variations having a period of one
year duration.
 There are four methods of constructing seasonal indices. They are
Simple averages method, Ratio to trend method, Percentage
moving average method, Link relatives method.
 Time series forecasting methods produce forecasts based solely
on historical values and they are widely used in business
situations where forecasts of a year or less are required.
 When the seasonal component is removed from the original data,
the reduced data are free from seasonal variations and is called
deseasonalised data.
13.8 KEY WORDS
Time series,decomposition of the time series, additive model, the
multiplicative model, Moving average method , least square method , Seasonal
variations , Simple averages method, Ratio to trend method, Percentage moving
average method, Link relatives method, forecasting , deseasonalised.
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 Analysis of Time Series
13.9 ANSWERS TO CHECK YOUR PROGRESS NOTES
1. Periodically, at equal time intervals, at successive points of
time
2.Cyclical movements
3. Time series are influenced by a variety of forces. Some are
continuously effective other make themselves felt at recurring
time intervals, and still others are non-recurring or random in
nature.
4. Time series forecasting methods produce forecasts based solely
on historical values and they are widely used in business
situations where forecasts of a year or less are required
5.There are four methods of constructing seasonal indices.
1. Simple averages method
2. Ratio to trend method
3. Percentage moving average method
4. Link relatives method

13.10 QUESTION AND EXERCISE

SHORT ANSWER QUESTION
1. What is time series?
2. What are the uses of time series
3. What are basic types of variations
LONG ANSWER QUESTION
1. Explain the components of time series
2. What are the various methods of estimating the trend components
3. Explain the moving average method? How is it calculated?
4. Describe the method of finding seasonal indices
5. Calculate the trend value by using three yearly moving average of
the following data

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Production 21 22 23 25 24 22 25 26 27 26

13.11 FURTHER READINGS

1. Spiegel, Murray R.: Theory and Practical of Statistics., London
McGraw Hill Book Company.
Self-Instructional Material
2. Yamane, T.: Statistics: An Introductory Analysis, New York,
HarperedRow Publication
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Analysis of Time Series 3. R.P. Hooda: Statistic for Business and Economic, McMillan India
Ltd.
NOTES 4. G.C. Beri: Statistics for Mgt., TMH.
5. J.K. Sharma: Business Statistics, Pearson Education.
6. 6. S.P. Gupta : Statistical Methods, Sultan Chand and Sons.

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 Index Numbers
UNIT XIV - INDEX NUMBER
Structure NOTES
14.0 Introduction
14.1 Objectives
14.2 Index Numbers
14.2.1 Types of Index Numbers
14.2.2 Problems in construction of Index Numbers
14.2.3 Methods of Constructing Index Numbers
14.2.4 Quantity or Volume Index Numbers
14.2.5 Test for Index Numbers
14.2.6 Chain Base Index Numbers

14.3 Cost of living Index Numbers

14.3.1 Construction of cost of living Index Numbers
14.3.2 Methods to construct cost of living Index Numbers
14.3.3 Uses of cost of living Index Numbers
14.4 Uses of Index Numbers
14.5 Limitations of Index Numbers
14.6 Summary
14.7 Key Words
14.8 Answers to Check Your Progress
14.9 Questions and Exercise
14.10 Further Readings
14.0 INTRODUCTION
Index numbers are a commonly used statistical device for
measuring the combined fluctuations in group-related variables. If we
wish to compare the prices of consumer items today with their prices ten
years ago, we are not interested in comparing the prices of only one item,
but in comparing average price levels. We may wish to compare the
present agricultural production or industrial production with that at the
time of independence. Here again, we have to consider all items of
production and each item may have undergone a different fractional
increase (or even a decrease). How do we obtain a composite measure?
This composite measure is provided by index numbers, which may be
defined as a device for combining the variations that have occurred to a Self-Instructional Material

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 group of related variables over a period of time, to obtain a figure that
Index Numbers represents the „net‟ result of the change in the constitute variables. In this
unit you will learn in detail about index numbers.
NOTES 14.1 OBJECTIVES
After going through this unit, you will
 Understand about index numbers and their types
 Learn about the different methods of calculating index numbers
 Know the uses and limitations of index numbers
14.2 INDEX NUMBERS
Index numbers are meant to study changes in the effects of factors
which cannot be measured directly. According to Bowley, “Index
numbers are used to measure the changes in some quantity which we
cannot observe directly”. For example, changes in business activity in a
country are not capable of direct measurement, but it is possible to study
relative changes in business activity by studying the variations in the
values of some such factors which affect business activity, and which are
capable of direct measurement.
Index numbers may be classified in terms of the variables that they
are intended to measure. In business, different groups of variables in the
measurement of which index number techniques are commonly used are
(i) price, (ii) quantity, (iii) value and (iv)business activity. Thus, we have
an index of wholesale prices, index of consumer prices, index of
industrial output, index of value of exports and index of business activity,
etc. Here we shall be mainly interested in index numbers of prices
showing changes with respect to time, although the methods described
can be applied to other cases. In general, the present level of prices is
compared with the level of prices in the past. The present period is called
the current period and some period in the past is called the base period.
14.2.1 TYPE OF INDEX NUMBER
Index numbers are names after the activity they measure. Their
types are as under:
Price Index: Measure changes in price over a specified period of time. It
is basically the ratio of the price of a certain number of commodities at
the present year as against base year.
Quantity Index : As the name suggest, these indices pertain to
measuring changes in volumes of commodities like goods produced or
goods consumed, etc.
Value Index: These pertain to compare changes in the monetary value of
imports, exports, production or consumption of commodities.

14.2.2 PROBLEMS IN THE CONSTRUCTION OF INDEX

NUMBERS
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taken before starting the actual construction of any type of index Index Numbers
numbers.
(i) Purpose of Index numbers under construction NOTES
(ii) Selection of base period
(iii) Selection of items
(iv) Selection of source data
(v) Collection of data
(vi) Selection of average
(vii) System of weighting
14.2.3 METHODS OF CONSTRUCTING INDEX NUMBERS
The index number for this purpose is divided into two:
(1) Unweighted Index number
 Simple aggregative
 Simple Average of price relatives
(2) Weighted Index number
 Weighted aggregative
 Weighted Average of price relatives

Unweighted Index number:

There are two methods of constructing unweighted index
numbers: (1) Simple Aggregative Method (2) Simple Average of
Relative Method
Simple Aggregative Method
In this method, the total price of commodities in a given (current)
year is divided by the total price of commodities in a base year and
expressed as percentage:
∑𝐏𝟏
P01 =∑𝐏𝟎 × 𝟏𝟎𝟎

Simple Average of Relative Method

In this method, we compute price relatives or link relatives of the
given commodities and then use one of the averages such as the
arithmetic mean, geometric mean, median, etc. If we use the arithmetic
mean as the average, then:
𝟏 𝐏𝟏
P01 = Ʃ 𝐏𝟎 𝒙𝟏𝟎𝟎
𝒏

The simple average of relative method is simpler and easier to apply than
the simple aggregative method. The only disadvantage is that it gives
equal weight to all items.
Example :
The following are the prices of four different commodities for
2017 and 2018. Compute a price index with the (1) simple aggregative Self-Instructional Material

185
 method and (2) average of price relative method by using both the
Index Numbers arithmetic mean and geometric mean, taking 2017 as the base.

NOTES

Commodity Cotton Wheat Rice Grams

Price in 2017 909 288 767 659

Price in 2018 874 305 910 573

Solution:

Commodity Price in Price in Price relative log p

2017 2018 𝐏𝟏
P=𝐏𝟎 × 𝟏𝟎𝟎
P0 P1

Cotton 909 874 69.15 1.9829

Wheat 288 305 105.90 2.0249

Rice 767 910 118.64 2.0742

Grams 659 573 86.95 1.9393

Total Ʃ P0 = Ʃ P1= ƩP = 407.64 Ʃ log P =

2623 2662 8.0213

1. Simple Aggregative Method

∑P1 2662
P01 =∑P0 × 100 = × 100 = 101.49
2623
2. Simple Average of Price Relative Method ( using the arithmetic
mean)
1 P1 1
P01 = Ʃ 𝑥 100 = (407.64) 𝑥 100 = 101.91
𝑛 P0 4

3. Average of price relative method ( using the geometric mean)

∑ log P 8.0213
P01 = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔( ) = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔( ) = 101.23
4 4
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Weighted Index number: Index Numbers
When all commodities are not of equal importance, we assign
weight to each commodity relative to its importance and the index NOTES
number computed from these weights is called a weighted index number.
Weighted aggregative index number:
In order to attribute appropriate importance to each of the items
used in an aggregate index number some reasonable weights must be
used. There are various methods of assigning weights and consequently
a large number of formulae for constructing index numbers have been
devised of which some of the most important ones are:
1. Laspeyre‟s Index Number
2. Paasche‟s Index Number
3. Fisher‟s Ideal Index Number
4. Marshal-Edge worth Index Number
Laspeyre’s Index Number:
In this index number the base year quantities are used as weights,
so it also called the base year weighted index.
∑𝐏𝟏𝐪𝟎
P01 = 𝒙𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎

Paasche’s Index Number:

In this index number the current (given) year quantities are used
as weights, so it is also called the current year weighted index.
∑𝐏𝟏𝐪𝟏
P01 = 𝒙𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟏

Fisher’s Ideal Index Number:

The geometric mean of Laspeyre‟s and Paasche‟s index numbers
is known as Fisher‟s ideal index number. It is called ideal because it
satisfies the time reversal and factor reversal test.
P01 = Laspeyre′s Index × Paashe′s Index
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
P01 = 𝒙 ∑𝐏𝟎𝐪𝟏 𝒙𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎

Marshal-Edgeworth Index Number:

In this index number the average of the base year and current year
quantities are used as weights. This index number was proposed by two
English economists, Marshal and Edgeworth.
∑𝐏𝟏𝐪𝟎 + ∑𝐏𝟏𝐪𝟏
P01 = ( Ʃ𝐏𝟎𝐪𝟎 + ∑𝐏𝟎𝐪𝟏 )𝒙𝟏𝟎𝟎
∑𝐏𝟏(𝐪𝟎 + 𝐪𝟏 )
P01 = 𝒙𝟏𝟎𝟎
Ʃ𝐏𝟎 (𝐪𝟎 +𝐪𝟏) Self-Instructional Material

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 Example:
Index Numbers Compute the weighted aggregative price index numbers for 2011
with 2010 as the base year using (1) Laspeyre‟s Index Number (2)
NOTES Paasche‟s Index Number (3) Fisher‟s Ideal Index Number (4) Marshal-
Edgeworth Index Number.

Prices Quantities
Commodity
2010 2011 2010 2011

A 10 12 20 22

B 8 8 16 18

C 5 6 10 11

D 4 4 7 8

Solution:

Prices Quantities
Commodity 2010 2011 2010 2011 P1q0 P0q0 P1q1 P0q1

P0 P1 q0 q1

A 10 12 20 22 240 200 264 220

B 8 8 16 18 128 128 144 144

C 5 6 10 11 60 50 66 55

D 4 4 7 8 28 28 32 32
ƩP1q0 ƩP0q0 ƩP1q1 ƩP0q1
= = = 506 = 451
456 406

Laspeyre‟s Index Number:

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 ∑P1q0 456
P01 = 𝑥 100 = 406 𝑥 100 = 112.32 Index Numbers
∑ P0q0

Paasche‟s Index Number: NOTES

∑P1q1 506
P01 = 𝑥 100 = 𝑥 100 = 112.20
∑ P0q1 451

Fisher‟s Ideal Index Number

P01 = Laspeyre′s Index × Paashe′s Index
P01 = 112.32 𝑥 112.20 = 112.26
Marshal-Edgeworth Index Number
∑P1(q0 + q1 ) 456 +506
P01 = 𝑥 100 = (406 +451 )𝑥 100 = 112.38
ƩP0 (q0 +q1)

Weighted average of price relatives:

When the specific weights are given for each commodity the
weighted index number is calculated by
Ʃ𝐩𝐰
Weighted Average of Price Relative index =
Ʃ𝐰
Where w = the weight of the commodity
𝑃1
p = the price relative index = 𝑥 100
𝑃0
When the base year value is P0q0 is taken as the weight i.e. w = P0q0 then
the formula is
𝑷𝟏
𝒙 𝟏𝟎𝟎 𝒙𝐏𝟎𝐪𝟎 ∑𝐏𝟏𝐪𝟎
𝑷𝟎
Weighted Average of Price Relative index = Ʃ = 𝒙 𝟏𝟎𝟎
𝐏𝟎𝐪𝟎 ∑ 𝐏𝟎𝐪𝟎

This is nothing but Laspeyre‟s formula

When the weight taken as w = P0q1 then the formula is
𝑷𝟏
𝒙 𝟏𝟎𝟎 𝒙𝐏𝟎𝐪𝟏
𝑷𝟎
Weighted Average of Price Relative index = Ʃ =
𝐏𝟎𝐪𝟏
∑𝐏𝟏𝐪𝟏
𝒙 𝟏𝟎𝟎
Ʃ𝐏𝟎𝐪𝟏

This is nothing but Paasche‟s formula

Example: Compute the weighted index number for the following data

Commodity Price Weight

Current year Base year

X 5 4 40
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189
 Y 3 2 60
Index Numbers
Z 2 1 20
NOTES
Solution:

Price
Commodity Weight P PW
Current Base 𝑃1
year year =𝑃0 𝑥 100

X 5 4 40 125 5000

Y 3 2 60 150 9000

Z 2 1 20 200 4000

120 18000

Ʃ𝑝𝑤 18000
Weighted Average of Price Relative index = = = 150
Ʃ𝑤 120

14.2.4 QUANTITY OR VOLUME INDEX NUMBER

Price index numbers measures and permit comparison of the price
of certain goods; quantity index number, on the other hand, measures the
physical volume of production, construction of employment. Though
price indices are more widely used, production indices are highly
significant as indicators of the level of output in the economy or in parts
of it.
In constructing quantity index numbers, the problems confronting
the statistician are analogous to those involved in price indices. We
measure changes in quantities, and when we weigh we use prices or
values as weights Quantity indices can be obtained easily by changing p
to q and q to p in the various formulae discussed above.
Thus, when Laspeyres method is used
∑𝐪𝟏𝐩𝟎
Q01 = 𝒙𝟏𝟎𝟎
∑𝐪𝟎𝐩𝟎

When Paasche‟s formula is used

∑𝐪𝟏𝐩𝟏
Q01 = 𝒙𝟏𝟎𝟎
∑𝐪𝟎𝐩𝟏

When Fisher‟s formula is used

∑𝐪𝟏𝐩𝟎 ∑𝐪𝟏𝐩𝟏
Q01 = 𝒙 𝒙𝟏𝟎𝟎
∑𝐪𝟎𝐩𝟎 ∑𝐪𝟎𝐩𝟏
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190
 These formulae represent the quantity index in which the Index Numbers
quantities of the different commodities are weighted by their prices.
Example: NOTES

Compute the following quantity indices from the data given

below (1) Laspeyre‟s Index Number (2) Paashe‟s Index Number (3)
Fisher‟s Ideal Index Number.

2002 2012
Commodity
Price Total value Price Total value

A 10 200 12 360

B 12 480 15 900

C 15 450 17 680

Solution :
Here instead of quantity, total values are given, hence find
quantities of base year and current year
𝑡𝑜𝑡𝑎𝑙𝑣𝑎𝑙𝑢𝑒
Quantity = 𝑝𝑟𝑖𝑐𝑒

Commodity p0 q0 p1 q1 p0 q0 p0 q1 p1 q0 p1 q1
10 20 12 30 200 300 240 360
A
10 40 15 60 400 600 600 900
B
15 30 17 40 450 600 510 680
C
Total 1050 1500 1350 1940

∑q1p0 1500
Laspeyre‟s method Q01 = 𝑥 100 = 𝑥 100 = 142.86
∑ q0p0 1050

∑q1p1 1940
Paasche‟s formula Q01 = 𝑥 100 = 1350 𝑥 100 = 143.7
∑ q0p1

∑q1p0 ∑q1p1
Fisher‟s formula Q01 = 𝑥 ∑ q0p1 𝑥 100
∑ q0p0

= 𝐿𝑥𝑃= 142.86 𝑥143.7

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= 143.27
191
 Index Numbers 14.2.5 TEST FOR INDEX NUMBER

NOTES There are certain tests which are put to verify the consistency, or
adequacy of an index number formula from different points of view. The
most popular among these are the following tests:
 Order reversal test.
 Time reversal test.
 Factor reversal test.
 Unit test.

At the outset, it should be noted that it is neither possible nor

necessary for an index-number formula to satisfy all the tests mentioned
above. But, an ideal formula should be such that it satisfies the maximum
possible tests which are relevant to the matter under study.
1. Order reversal test:
This test requires that a formula of Index number should be such
that the value of the index number remains the same, even if, the order of
arrangement of the items is reversed, or altered. As a matter of fact, this
test is satisfied by all the formulas of index number explained in this
chapter.

2. Time reversal test:

The time reversal test requires that the index number computed
backwards should be the reciprocal of the index number computed
forward, except for the constant of proportionality
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
P01 = 𝒙 ∑𝐏𝟎𝐪𝟏
∑𝐏𝟎𝐪𝟎

∑𝐏𝟎𝐪𝟏 ∑𝐏𝟎𝐪𝟎
P10 = 𝒙 ∑𝐏𝟏𝐪𝟎
∑𝐏𝟏𝐪𝟏

∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏 ∑𝐏𝟎𝐪𝟏 ∑𝐏𝟎𝐪𝟎

P01 x P10 = 𝒙 𝒙 𝒙
∑𝐏𝟎𝐪𝟎 ∑𝐏𝟎𝐪𝟏 ∑𝐏𝟏𝐪𝟏 ∑𝐏𝟏𝐪𝟎

P01 x P10 = 1
Laspeyre‟s and Paasche„s method do not satisfy this test but
Fisher‟s ideal index satisfies this method. Besides both the simple and
weighted geometric mean of piece relatives, also, satisfy this time
reversal test.
3. Factor reversal test:
This test has also been put forth by Prof. Irving Fisher, in this test
the product of price index and quantity index must be equal to the value
index. Thus, for the Factor Reversal test, a formula of index number
should satisfy the following equation:
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Price index × Quantity Index = Value Index
192
 ∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏 Index Numbers
P01 = 𝒙 ∑𝐏𝟎𝐪𝟏
∑𝐏𝟎𝐪𝟎
NOTES
∑𝐪𝟏𝐩𝟎 ∑𝐪𝟏𝐩𝟏
Q01 = 𝒙
∑𝐪𝟎𝐩𝟎 ∑𝐪𝟎𝐩𝟏
∑𝐩𝟏𝐪𝟏
∴ P01 x Q01 = ∑𝐩𝟎𝐪𝟎
Most of the formulae of index number discussed above fail to
satisfy this acid test of consistency except that of Prof. Irving Fisher.
4.Unit test
This test suggests that the formula for constructing an index
should be independent of the unit of measurement in which the prices
and quantities are quoted. Except unweighted aggregative index number
all other formulas in this chapter satisfy this test.

Example:
Construct Fisher‟s ideal index for the following data. Test whether it
satisfies time reversal test and factor reversal test.

Commodity Base year Current year

Quantity Price Quantity Price

A 24 20 30 24

B 30 14 40 10

C 10 10 16 18

Solution:

Commodity q0 p0 q1 p1 p0 q0 p0 q1 p1 q0 p1 q 1
24 20 30 24 480 600 576 720
A
30 14 40 10 420 560 300 400
B
10 10 16 18 100 160 180 288
C
1000 1320 1056 1408

∑P1q0 ∑P1q1 1056 1408

Fisher ideal index number P01 = ∑ P0q0
𝑥 ∑ P0q1 𝑥 100 = 1000
𝑥 1320 𝑥 100

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= 1.056 𝑥1.067 x 100 = 1.127 x 100
193
 Index Numbers = 1.062 x 100 = 106.2

NOTES Time Reversal test:

Time Reversal test is satisfied when P01 x P10 = 1

P1q0 ∑P1q1 1056 1408

P01 = 𝑥 = 𝑥
∑P0q0 ∑P0q1 1000 1320

∑P0q1 ∑P0q0 1320 1000

P10 = 𝑥 ∑P1q0 = 𝑥 1056
∑P1q1 1408

1056 1408 1320 1000

P01 x P10 = 𝑥 x 𝑥 = 1 = 1
1000 1320 1408 1056

Hence Fisher ideal index satisfy the time reversal test

Factor Reversal Test:

∑P1q0 ∑P1q1 1056 1408

P01 = 𝑥 ∑ P0q1 = 𝑥 1320
∑ P0q0 1000

∑q1p0 ∑q1p1 1320 1408

Q01 = 𝑥 ∑ q0p1 = 𝑥 1056
∑ q0p0 1000

1056 1408 1320 1408 1408

∴ P01 x Q01 = 𝑥 1320 𝑥 1000 𝑥 1056 = ( 1000 )²
1000

1408 ∑p1 q1
= =
1000 ∑p0 q0
Hence Fisher ideal index number satisfy the factor reversal test

14.2.6 CHAIN BASE INDEX NUMBER

In this method, there is no fixed base period; the year

immediately preceding the one for which the price index has to be
calculated is assumed as the base year. Thus, for the year 1994 the base
year would be 1993, for 1993 it would be 1992, for 1992 it would be
1991, and so on. In this way there is no fixed base and it keeps on
changing.
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194
 The chief advantage of this method is that the price relatives of a Index Numbers
year can be compared with the price levels of the immediately preceding
year. Businesses mostly interested in comparing this time period rather NOTES
than comparing rates related to the distant past will utilize this method.
Price in the Current Year
Link relative of current years =Price in the preceding Year
𝑥 100

𝐏𝐧
𝐏𝐧 − 𝟏 , 𝐧 = 𝒙𝟏𝟎𝟎
𝐏𝐧 − 𝟏
Example:

Find the index numbers for the following data taking 2010 as the base
year

Years 2004 2005 2006 2007 2008 2009

18 21 25 23 28 30
Price

Solution:

Year Price Link Relatives Chain indices

𝐏𝐧
𝒙𝟏𝟎𝟎
𝐏𝐧 − 𝟏

18 18 100
2004 𝑥 100 = 100
18
21 21 100 x 116.67
2005 𝑥 100 = 116.67 = 116.7
18 100
25 25 116.67 x 119.05
2006 𝑥 100 = 119.05
21 100
= 138.9
23 23 138.9 x 92
2007 𝑥 100 = 92 = 127.79
25 100
28 28 127.79 x 121.74
2008 𝑥 100 = 121.74
23 100
= 155.57
30 30 155.57 x 107.14
2009 𝑥 100 = 107.14
28 100
= 166.68 Self-Instructional Material

195
 Index Numbers
CHECK YOUR PROGRESS – 1
NOTES 1.What is chain base index number
2. What is the formula for Fisher‟s Ideal Index Number?
3. What is weighted index number?

14.3 COST OF LIVING INDEX NUMBER

Cost of living index numbers measure the changes in the prices
paid by consumers for a special “basket” of goods and services during
the current year as compared to the base year. The basket of goods and
services will contain items like (1) Food (2) Rent (3) Clothing (4) Fuel
and Lighting (5) Education (6) Miscellaneous like cleaning, transport,
newspapers, etc. Cost of living index numbers are also called consumer
price index numbers or retail price index numbers.
14.3.1 CONSTRUCTION OF COST OF LIVING INDEX
NUMBERS

The following steps are involved in the construction of Cost of living

index numbers.
(1) Class of People:
The first step in the construction of the Cost of living index (CLI)
is that the class of people should be defined clearly. It should be decided
whether the cost of living index number is being prepared for industrial
workers, or middle or lower class salaried people living in a particular
area. It is therefore necessary to specify the class of people and locality
where they reside.
(2) Family Budget Inquiry:
The next step in the construction of a Cost of living index number
is that some families should be selected randomly. These families
provide information about the cost of food, clothing, rent, miscellaneous,
etc. The inquiry includes questions on family size, income, the quality
and quantity of resources consumed and the money spent on them, and
the weights are assigned in proportions to the expenditure on different
items.
(3) Price Data:
The next step is to collect data on the retail prices of the selected
commodities for the current period and the base period when these prices
should be obtained from the shops situated in the locality for which the
index numbers are prepared.

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(4) Selection of Commodities:
196
 The next step is the selection of the commodities to be included. Index Numbers
We should select those commodities which are most often used by that
class of people. NOTES
14.3.2 METHODS TO COMPUTE COST OF LIVING INDEX
NUMBERS
There are two methods to compute cost of living index numbers:
(1) Aggregate Expenditure Method (2) Family Budget Method

Aggregate Expenditure Method

In this method, the quantities of commodities consumed by the
particular group in the base year are estimated and these figures or their
proportions are used as weights. Then the total expenditure of each
commodity for each year is calculated. The price of the current year is
multiplied by the quantity or weight of the base year. These products are
added. Similarly, for the base year the total expenditure of each
commodity is calculated by multiplying the quantity consumed by its
price in the base year. These products are also added. The total
expenditure of the current year is divided by the total expenditure of the
base year and the resulting figure is multiplied by 100 to get the required
index numbers. In this method, the current period quantities are not used
as weights because these quantities change from year to year.

∑𝐏𝟏𝐪𝟎
P01 = 𝒙𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎

Here,
P1 - Represent the price of the current year,
P0 - Represents the price of the base year and
q0- Represents the quantities consumed in the base year.

Family Budget Method:

In this method, the family budgets of a large number of people are

carefully studied and the aggregate expenditure of the average family for
various items is estimated. These values are used as weights. The current
year‟s prices are converted into price relatives on the basis of the base
year‟s prices, and these price relatives are multiplied by the respective
values of the commodities in the base year. The total of these products is
divided by the sum of the weights and the resulting figure is the required
index numbers.
∑𝐖𝐈
P01 = ∑𝐖 𝒙𝟏𝟎𝟎

∑𝐏𝟏
Here, I=∑𝐏𝟎 𝒙𝟏𝟎𝟎 and ƩW=P0q0
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Example:
197
 Index Numbers Construct the cost of living index number for 2018 on the basis of
2017 from the following data using (1) Aggregate Expenditure Method
NOTES (2) Family Budget Method.

Commodity Quantity Prices

Consumed in 2017
2017 2018
(in quintal )

A 6 315.75 316.00

B 6 305.00 308.00

C 1 416.00 419.00

D 6 528.00 610.00

E 4 120.00 119.50

F 1 1020.00 1015.00

Solution:
The cost of living index number of 2018 by Aggregate Expenditure
method:

Quantity Prices
Commodity Consumed P1q0 P0q0
2017 2018
in 2017
P0 P1
(in quintal )
q0

A 6 315.75 316.00 1896 1894.50

B 6 305.00 308.00 1848 1830.00

C 1 416.00 419.00 419 416.00

D 6 528.00 610.00 3660 3168.00

E 4 120.00 119.50 478 480.00

F 1 1020.00 1015.00 1015 1020.00

Ʃ P1q0 Ʃ P0q0 =
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198
 = 9316 8808.5 Index Numbers

The cost of living index number of 2018 is NOTES

∑𝐏𝟏𝐪𝟎 𝟗𝟑𝟏𝟔
P01 = ∑𝐏𝟎𝐪𝟎 𝒙𝟏𝟎𝟎 = 𝟖𝟖𝟎𝟖.𝟓 𝒙𝟏𝟎𝟎 = 105.76

The cost of living index number of 2018 by Family Budget Method:

Quantity Prices W=P0q I= Product

∑𝐏𝟏
Commodit Consume 0
∑𝐏𝟎
𝒙𝟏𝟎𝟎 WI
y d in 2017 2017 2018
(in quintal P0 P1
) q0

A 6 315.75 316.00 1894.5 100.08 189601.56

B 6 305.00 308.00 1830.0 100.98 184793.40

C 1 416.00 419.00 416.0 100.72 41899.52

D 6 528.00 610.00 3168.0 115.53 365999.04

E 4 120.00 119.50 480.0 99.58 47798.4

F 1 1020.0 1015.0 1020.0 99.51 101500.20

0 0

ƩW = ƩWI
8808.5 =931592.1
2

The cost of living index number of 2018 is

∑WI 931592 .12
P01 = ∑W 𝑥 100 = 8808 .5 = 105.76

14.3.3 USES OF COST OF LIVING INDEX NUMBER

 They indicate the changes in the consumer prices. Thus they help
government in formulating policies regarding control of price,
taxation, imports and exports of commodities, etc.
 They are used in granting allowances and other facilities to
employees
 They are used for the evaluation of purchasing power of money.
They are used for deflating money
 They are used for comparing changes in the cost of living of
differenc classes of people Self-Instructional Material

199
 14.4 USES OF INDEX NUMBER
Index Numbers The main uses of index numbers are given below.
NOTES  Index numbers are used in the fields of commerce, meteorology,
labour, industry, etc.
 Index numbers measure fluctuations during intervals of time,
group differences of geographical position of degree, etc.
 They are used to compare the total variations in the prices of
different commodities in which the unit of measurements differs
with time and price, etc.
 They measure the purchasing power of money.
 They are helpful in forecasting future economic trends.
 They are used in studying the difference between the comparable
categories of animals, people or items.
 Index numbers of industrial production are used to measure the
changes in the level of industrial production in the country.
 Index numbers of import prices and export prices are used to
measure the changes in the trade of a country.
Index numbers are used to measure seasonal variations and cyclical
variations in a time series.
14.5 LIMITATIONS OF INDEX NUMBER
 They are simply rough indications of the relative changes.
 The choice of representative commodities may lead to fallacious
conclusions as they are based on samples.
 There may be errors in the choice of base periods or weights, etc.
 Comparisons of changes in variables over long periods are not
reliable.
 They may be useful for one purpose but not for another.
 They are specialized types of averages and hence are subject to all
those limitations which an average suffers from.
CHECK YOUR PROGESS - 2
4. What are the methods to compute Cost of Living Index
numbers?
5. What are thepopularTests for Index number?
6.Write a few uses of index number.

14.6 SUMMARY
 Index numbers are meant to study changes in the
effects of factors which cannot be measured directly.
According to Bowley, “Index numbers are used to
measure the changes in some quantity which we cannot
observe directly”.
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200
  . Price Index Quantity Index Value Index.Quantity Index Index Numbers
Numbers are the types of index numbers.
 Price index numbers measures and permit comparison of NOTES
the price of certain goods; quantity index number, on the
other hand, measures the physical volume of production,
construction of employment. Though price indices are
more widely used, production indices are highly
significant as indicators of the level of output in the
economy or in parts of it.
 There are certain tests which are put to verify the
consistency, or adequacy of an index number formula
from different points of view. The most popular among
these are the following tests: (1)Order reversal test.(2)
Time reversal test. (3) Factor reversal test. (4)Unit test.
 In this method, there is no fixed base period; the year
immediately preceding the one for which the price index
has to be calculated is assumed as the base year.
 Cost of living index numbers measure the changes in the
prices paid by consumers for a special “basket” of goods
and services during the current year as compared to the
base year.
 There are two methods to compute cost of living index
numbers: (1) Aggregate Expenditure Method (2) Family
Budget Method.
8.7 KEY WORDS
Index numbers,Price Index, Quantity Index, Value Index, Laspeyre‟s
Index Number, Paasche‟s Index Number, Fisher‟s Ideal Index
Number, Marshal-Edge worth Index Number,Order reversal test,
Time reversal test, Factor reversal test, Unit test,Chain Base index
number, Cost of living index number.

8.8 ANSWERS TO CHECK YOUR PROGRESS

1. In this method, there is no fixed base period; the year immediately
preceding the one for which the price index has to be calculated is
assumed as the base year.
2.P01 = Laspeyre′s Index × Paashe′s Index
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
P01 = 𝒙 𝒙𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎 ∑𝐏𝟎𝐪𝟏

3.When all commodities are not of equal importance, we assign weight to

each commodity relative to its importance and the index number
computed from these weights is called a weighted index number.
Self-Instructional Material
4.There are two methods to compute cost of living index numbers: (1)
201
 Aggregate Expenditure Method (2) Family Budget Method
Index Numbers 5. Order reversal test, Time reversal test, Factor reversal test, Unit test
NOTES 6. Index numbers are used in the fields of commerce, meteorology,
labour, industry, etc.Index numbers measure fluctuations during intervals
of time, group differences of geographical position of degree, etc.They
are used to compare the total variations in the prices of different
commodities in which the unit of measurements differs with time and
price, etc.They measure the purchasing power of money.They are helpful
in forecasting future economic trends
14.9 QUESTIONS AND EXERCISE
SHORT ANSWER QUESTIONS
1. Define index number and write the uses of index numbers
2. State the types of index numbers
3. State the methods of constructing consumer price index

LONG ANSWER QUESTIONS

1. Compute (1) Laspeyre‟s (2) Paasche‟s index number for the 2001
from the following
Commodity Price Quantity
2002 2010 2002 2010
4 6 8 7
W
3 5 10 8
X
2 4 14 12
Y
5 7 19 11
Z

2. Calculate Fisher‟s ideal index method for the following data

Commodity 2011 2012
Price Quantity Price Quantity
2 7 3 5
A
5 11 6 10
B
3 14 5 11
C
4 16 4 18
D
3. Construct the consumer price index number of 2015 on the from
the following data using
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202
 (i) the average expenditure method and Index Numbers
(ii) the family budget method
NOTES
Commodity Quantity Prices
Consumed in 2014
2014 2015

A 6 Kg 5 7

B 6 Quintal 6 6

C 5 Quintal 5 4

D 6 Quintal 7 7

E 4 Quintal 8 8

F 5 Kg 9 9

14.10 FURTHER READINGS

(1) Statistics (Theory & Practice) by Dr. B.N. Gupta. SahityaBhawan
Publishers andDistributors (P) Ltd., Agra.
(2) Statistics for Management by G.C. Beri. Tata McGraw Hills
Publishing CompanyLtd., New Delhi.
(3) Business Statistics by Amir D. Aczel and J. Sounderpandian. Tata
McGraw HillPublishing Company Ltd., New Delhi.
(4) Statistics for Business and Economics by R.P. Hooda. MacMillan
India Ltd., NewDelhi.
(5) Business Statistics by S.P. Gupta and M.P. Gupta. Sultan Chand
and Sons.,NewDelhi.
(6) Statistical Method by S.P. Gupta. Sultan Chand and Sons., New
Delhi.

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203
 DISTANCE EDUCATION – CBCS – (2018 – 2019 Academic Year Onwards)
Question Paper Pattern – BUSNESS STATISTICS
(UG Programs)
Time: 3 Hours Maximum: 75 Marks
Part – A (10 x 2 = 20 Marks)
Answer all questions
1. What is chi-square test?
2. What is meant by analysis of variance?
3. Write short note on index number.
4. Describe Type II error
5. Write any four advantages of statistics
6. Explain the term Probable Error
7. What is meant by Binomial Distribution?
8. Define the term “Correlation”
9. What is meant by Regression?
10. What is forecasting?

Part – B (5 x 5 = 25 Marks)
Answer all questions choosing either (A) or (B)
11. (A) what are the importances of statistics?

(or)

(B) Calculate median from the following data

Profit : 100 – 200 200 – 300 300 – 400 400 – 500 500 – 600 600 – 700 700 – 800
No. of Shops: 10 18 20 26 30 28 18

12. A) Find rank correlation.

X : 1 2 3 4 5

Y : 5 4 3 4 1

(or)
(B) What is the probability that a leap year will contain 53 Sundays?

13. (A) The manufacture of a certain make of electric bulbs claims that the bulbs have a mean life of 25
months with a life of 25 onths with a standard deviation of 5 months. A random sample of 6 such
bulbsgave the following values.
Life of months: 24 26 30 20 20 18
Can you regard the producer’s claim to be valid at 1% level of significance? V = 4.032

(or)
 (B). Find standard deviation from the following observations.
Size : 120 125 130 135 140 145 150 155 160
Frequencies : 2 3 3 1 2 7 4 2 8

14. (A) The first of two samples consists of 23 pairs and gives a correlation coefficient of 0.5 while
the second of 28 pairs has the correlation coefficient of 0.8. Are these values significantly
different?
(or)

(B) Explain in brief the assumptions of ANOVA.

15. (A) Calculate the 3 yearly and 5 yearly moving averages of the data
Years 1 2 3 4 5 6 7 8 9 10 11 12

sales 5.2 4.9 5.5 4.9 5.2 5.7 5.4 5.8 5.9 6.00 5.2 4.8

(or)
(B) Calculate trend values by the method of least square from data given below and estimate the
sales for 2003

Years: 1996 1997 1998 1999 2000

Sales of Co.A, (₹ Lakhs) 70 74 80 86 90

Part – C (3 x 10 = 30 Marks)
Answer any three out of five questions
16. Eight coins are tossed simultaneously 256 times. Number of heads observed at each throw is
recorded as given below:
No. of Heads: 0 1 2 3 4 5 6 7 8
Frequencies : 2 6 30 52 67 56 32 10 1

Fit a binomial distribution and the expected frequency. Also find the mean and standard
deviation
17. The quantity of raw materials purchased by a company at the specified prices during the 12
months of 2017 is given as follows:

Months J F M A M J JY A S O N DEC

Price in 96 110 100 90 86 92 112 112 108 116 86 92

Rs

Quantity 250 200 250 280 300 300 220 220 200 210 300 250
Per kg

a. Find the regression equations based on the above data.

b. Can you estimate the approximate quantity likely to be purchased if the price shoots up to
Rs.124 per kg?

18. 200 digits are chosen at random from a set of tables. The frequencies of the digits are as follows
Digit : 0 1 2 3 4 5 6 7 8 9
F : 18 19 23 21 16 25 22 20 21 15
Use Chi-Square test to assess the correctness of the hypothesis that the digits were distributed in
equal numbers in the tables from which they were chose. V, 9 = 16.22

19. The sales data of an item in six shops before and after a special promotional campaign are as under:
Before Campaign: 53 28 31 48 50 42
After Campaign : 58 29 30 55 56 45
Can the campaign be judged to be a success? Test at 5% level of significance. V= t0.05 = 2.57

20. Construct L & P method of index.

Price Quantity

Types 2012 2014 2012 2014

X 9 15 5 5

Y 4 12 10 11

Z 1 5 6 6