QUANTITATIVE METHODS​

Module 4: INDEX NUMBERS AND TIME SERIES

ANALYSIS

Unit 1: Time Series Analysis

MBA
 Time Series Analysis

➢ Time series analysis: Meaning and Components of Time Series.

➢ Variations in time series

➢ Smoothing Methods:

❑ trend analysis, cyclical variations, seasonal variations and irregular variations.

➢ Index Numbers: Unweight and Weighted Index numbers.

 Time Series - Forecasting

➢ Arrangement of Statistical data in Chronological order in accordance with different time periods is called Time
series.

➢Time series plays a vital role in Business Management for future planning

❑Ex: money in circulation for a decade, bank deposits and clearings for a financial year, sales and profits of a
departmental store in a quarter, agricultural and industrial production of a calendar year etc..

“A time series is a set of observation taken at specified times, usually at equal intervals”.

Definition:

“A time series may be defined as a collection of reading belonging to different time periods of some economic or
composite variables”.
➢ The variable“Time” which is independent variable & and the second is “Data” which is the dependent
variable.

➢ Mathematically, a time series is defined by the functional relationship

➢ Ut = f(t)

➢ Where Ut is the value of the phenomenon (Variable - Dependent)

➢ f(t) is the function of time (Independent Variable)

➢ Ex: population (Ut) of India in different Years (t)

➢ The sales (Ut) of a departmental store in different months(t)

➢ The production (Ut) of a manufacturing unit in different hours(t)

Examples
Day No. of Packets of milksold Year Population (in Million)
Monday 90 1921 251
Tuesday 88 1931 279
Wednesday 85 1941 319
Thursday 75 1951 361
Friday 72 1961 439
Saturday 90 1971 548
Sunday 102 1981 685

➢ From example 1 it is clear that the sale of milk packets is decrease

❑ from Monday to Friday then again its start to increase.
➢ Same thing in example 2 the population is continuously increase.
 Components Of Time Series

➢ The change which are being in time series, They are effected by Economic, Social, Natural, Industrial & Political
Reasons. These reasons are called components of Time Series and are classifies into 4 types
➢ Secular trend or Long-term Movement
➢ Periodic Changes or Short-term Movement
❑ Seasonal Variation
▪ Resulting from the natural forces
▪ Resulting from Man-made conventions
➢ Cyclic Variations
➢ Random or Irregular variations
 Secular Trend Or Long-term Movement

➢ The increase or decrease in the movements of a time series is called Secular trend .
➢ A time series data may show upward trend or downward trend for a period of years and this may be due to
factors like:
❑ Increase in population.
.
❑ Change in technological progress.
❑ Large scale shift in consumers demands

➢ Ex: population increases over a period of time, price increases over a period of years, increases over a period of
years, are the examples of upward trend.

➢ The sales of a commodity may decrease over a period of time because of better products coming to the market,
an example of declining trend or downward.
 Periodic Changes Or Short-term Movement

➢ The changes in Time series over period of within One Year are called Periodic
Changes or Short-term Movement.
Ex: Periodic Changes are broadly classified as Seasonal Variations
.
❑ These variations inn time series are due to the rhythmic forces
which operate in a regular and periodic manner over a span of less
than a year.
❑ Seasonal variations can be classified as
▪ Resulting from the natural forces
▪ Resulting from Man-made conventions
 Cyclic Variations

Cyclical variations are recurrent upward or downward movements in a time series but the period of cycle is greater
than a year. Also these variations are not regular as seasonal variation.

Ex: Business Cycle

 Random Or Irregular Variations

Irregular variations are fluctuations in time series that are short in duration due to Floods, Earth quakes, Wars Etc..
 Mathematical Model For Time Series

Additive Model

According to Additive Model, the Time Series can be Expressed as Ut = Tt+St+Ct+Rt

Where Ut - time series value at time t

Tt – Trend Value

St – Seasonal Variations

Ct – Cyclic Variations

Rt – Random or Irregular Variations

 Mathematical Model for Time Series

Multiplicative Model

According to Multiplicative Model, the Time Series can be Expressed as Ut = Tt.St.Ct.Rt

Where Ut - time series value at time t

Tt – Trend Value

St – Seasonal Variations

Ct – Cyclic Variations

Rt – Random or Irregular Variations

 Measures Of Secular Trend

➢ Various methods used to the measure the secular Trend or long term moment are

❑ Free Hand Curve Method

❑ Semi – Average Method

❑ Moving Average Method

❑ Least Square Method

 Free Hand Curve Method

In this method, the Time series data is represented in two-dimensional plane(Graph) and draw a smooth hand curve to
understand the tendency of the data. We take “Time” on ‘x’ axis and “Data” on the ‘y’ axis.

Example:

Draw a free hand curve on the basis of the following data also draw the trend line and estimate the profit for
1997:

Years 1989 1990 1991 1992 1993 1994 1995 1996

Profit 148 149 149.5 149 150.5 152.2 153.7 153
155 Y

154

153

152 Trend Line

151

150
Profit ('000)
149
The
148 Actual Data estimated
Profit for
147 1997 is 154

146

145 X
1997
1989 1990 1991 1992 1993 1994 1995 1996
 Practice Problems

Draw a free hand curve on the basis of the following data also draw the trend line and estimate the profit for
1999 and 2008:

Years 2000 2001 2002 2003 2004 2005 2006 2007

Profit 47 52 68 72 78 70 88 92

Years 2010 2011 2012 2013 2014 2015 2016

Profit 142 120 102 87 92 70 60
 Semi-Average Method

➢ This method is also similar to free hand curve method in which the semi averages are calculated and represented
in the graph.
➢ In this method the given data are divided in two parts, preferable with the equal number of years.
➢ If the data contains even periods, then divide them into two equal parts and find the semi averages.
➢ If the data contains odd periods, then ignore the middle period and divide them into two equal parts and find the
semi averages.
➢ Draw the free hand curve with the data and trend line using semi averages
 Example:
Find the trend line from the following data by Semi – Average Method:-

Year 1989 1990 1991 1992 1993 1994 1995 1996

Production 150 152 153 151 154 153 156 158

(M.Ton.)

There are total 8 trends. Now we distributed it in equal part.

Now we calculated Average mean for every part.

First Part=150 + 152 + 153 + 151 = 151.50

4

Second Part =154 + 153 + 156 + 158= 155.25

4
Production
160

158

Trend Line
156

154 155.25

Production
152

Actual Line
150 151.50

148

146
1989 1990 1991 1992 1993 1994 1995 1996
 Practice Problems

Find the trend line from the following data by Semi – Average Method

Years 2000 2001 2002 2003 2004 2005 2006 2007

Profit 47 52 68 72 78 62 52 40

Find the trend line from the following data by Semi – Average Method

Years 2010 2011 2012 2013 2014 2015 2016

Profit 142 120 102 87 92 102 160
 Moving Average Method

It is one of the most popular method for calculating Long Term Trend. This method is also used for ‘Seasonal
fluctuation’, ‘cyclical fluctuation’ & ‘irregular fluctuation’. In this method we calculate the ‘Moving Average forcertain
years.

Example:
If we calculating ‘Three year’s Moving Average’ then according to this method:

= (1)+(2)+(3) (2)(3)(4) (3)(4)(5)

__________ __________ __________
3 3 3
Where (1),(2),(3),………. are the various years of time series.
 Moving Average Method

Example

Find out the five year’s moving Average:

Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Price 20 25 33 33 27 35 40 43 35 32 37 48 50 37 45
Year Price of sugar Five year’s moving Total Five year’s moving
(1) (Rs.) (2) (3) Average (Col 3/5) (4)

1982 20 - -
1983 25 - -
1984 33 135 27
1985 30 150 30
1986 27 165 33
1987 35 175 35
1988 40 180 36
1989 43 185 27
1990 35 187 37.4
1991 32 195 39
1992 37 202 40.4
1993 48 204 40.8
1994 50 217 43.4
1995 37 - -
1996 45 - -
 Practice Problems

Find the three yearly and four yearly moving averages for the following data

Years 2000 2001 2002 2003 2004 2005 2006 2007

Profit 47 52 68 72 78 62 52 40

Find the four yearly moving averages for the following data

Years 2010 2011 2012 2013 2014 2015 2016

Profit 142 120 102 87 92 102 160
 Method Of Least Squares
Fit
Method of Least Squares is an important method to determine the trend in the time series data by fitting Linear of
Non-Linear curves.

Linear Trend
Fitting of a straight line (Y=a+bx)

Non-linear Trend

Second degree Parabola (y= a+bx+cx2)

nth degree Polynomial (y=a0+a1x+a2x2+………………+anxn )

Exponential function (y=aex )

Power function(y=axb)
Fitting Of A Straight Line (Y=a+bx)

Y –Dependent Variable(Data)
X- Independent Variable (Time)
a- Intercept
b- Slope
The Normal equations to determine the values of a and b are

y =n.a+b x

xy =a x +b x2

By substituting the obtained values of a and b in the Straight line and is the best fit for the given data.
 Example

Draw a straight line trend and estimate trend value for 1996:

Year (X) 1991 1992 1993 1994 1995

Production 8 9 8 9 16
(Y)

Given that the form of straight line is Y=a+bx

The normal equations to determine the values of a and b are

y =n.a+b x
xy =a x +b x2
 Deviation From Trend
Year 1990 Y XY X2 Yc = a + bx
(1) X (3) (4) (5) (6)
(2)

1991 1 8 8 1 5.2 + 1.6(1) = 6.8

1992 2 9 18 4 5.2 + 1.6(2) = 8.4

1993 3 8 24 9 5.2 + 1.6(3) = 10.0

1994 4 9 36 16 5.2 + 1.6(4) = 11.6

1995 5 16 80 25 5.2 + 1.6(5) = 13.2

N= 5 XY XY X
2

’ = 15 =50 = 166 = 55
Now we calculate the value of two constant ‘a’ and ‘b’ with the help of two equation:-
 Y Na b X
2
XY a X b X

Now we put the value of X, Y, XY , X 2 ,& N :-

50 = 5a + 15(b) ……………. (i)

166 = 15a + 55(b) ……………… (ii)

Or 5a + 15b = 50 ……………… (iii)

15a + 55b = 166 (iv)
………………….
Equation (iii) Multiply by 3 and subtracted by (iv)

-10b = -16
b = 1.6
Now we put the value of “b” in the equation (iii)
= 5a + 15(1.6) = 50
5a = 26
26
a = 5 = 5.2
As according the value of ‘a’ and ‘b’ the trend line:-
Y= a + bx
Y= 5.2 + 1.6X

Now we calculate the estimated production

for 1996:-
Y1996 = 5.2 + 1.6 (6) = 14.8
Example

A study of demand for past 10 years data given below and draw the trend and also estimate demand in the year 2005.

Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Demand 80 84 80 88 98 92 84 88 80 100

Given below, seasonal demand for electricity in Ahmedabad (2001-2011). Forecast the demand for 2012 by fitting a
trend line to the data.

Time period 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Quantity 11 14 16 13 17 20 23 25 27 31 35
THANK YOU