Topic : Components of Time series analysis

Unit : I
Subject Code : HMMS18006
Subject Name : Trend Analysis and Index numbers
Delivered by : Dr. A. Mahalakshmi
Book Title of Book Remarks
No.
1. Statistical Methods by S. P. Gupta UNIT-1-3
&5
2. Gupta S.C.., Kapoor, V.K., Fundamentals of Applied Statistics, S. Chand & UNIT 4
Co.,(2007)
3. Douglas C. Montgomery, Cheryl Jennings, Murat Kuhalci, Introduction to time UNIT 1-5
series and Forecasting, Second Edition, Wiley Eastern Pub.
4. A.K. Sharma, Text Book of Index number and Time series, Discovery Publishing UNIT 1-5
house,(2005)
Introduction:
One of the most important tasks before economists and businessman
these days is to make estimates for the future.

For example, a businessman is interested in finding out his likely sales in the year
2016 or as a long-term planning in 2020 or the year 2030 so that he could adjust
his production accordingly and avoid possibility of either unsold stocks or
inadequate production to meet the demand.
Similarly, an economist is interested in estimating the likely population in
the coming year so that proper planning can be carried out with regard to
food supply, jobs for the people, etc.

However, the first step in making estimates for the future consists of
gathering information from the past.

In this connection one usually deals with statistical data which are collected,
observed or recorded at successive intervals of time. Such data generally
referred to us “time series”.
Thus, when we observe numerical data at different points of time the set of
observation is known as time series. For example, if we observe production,
sales, population, imports, exports, etc., at different points of time, say, over the
last 5 or 10 years, the set of observations formed shall constitute time series.

Hence, the analysis of time series, time is the most important factor because the
variable is related to time which may be either year, month, week, day, or even
minutes or seconds.
Time Series:

A time series is a set of observations measured at time or space intervals

arranged in chronological order. For instance, the yearly demand of a
commodity, weekly prices of an item, food production in India from year to
year, etc. A time series consists of four components.
Many economists and statisticians have defined time series in different
words.

Moris Hamburg: A time series is a set of statistical observations arranged

in chronological order.

Patterson: A time series consists of statistical data which are collected, recorded
or observed over successive increments.

Werner Z. Hirsch: A time series is a sequence of values of the same variate

corresponding to successive points of time.
Real life examples of Time series analysis:
Retail sales:
Stock prices:
Weather:
Heart rate:
Subscribers:
Utility of time series analysis:
The analysis of time series is of great significance not only to the economist and
businessman but also to the scientists, astronomies, geologist, sociologist,
biologist, research worker, etc. for reasons given below:

It helps in understanding past behaviour:

By observing data over a period of time one can easily understand what changes
have taken place in the past. Such analysis will be extremely helpful in
predicting the future behaviour.

The time series analysis helps to compare two or more series, it helps to know
the behaviour of business and used to make predictions.
It helps in planning future operations: Plans for the future cannot be
made without forecasting events and relationship they will have.
Statistical techniques have been evolved which enable time series to
be analysed in such a way that the influences which have determined
the form of the series may be ascertained. Thus time series analysis
helps us to cope with uncertainly about the future.
It helps in evaluating current accomplishment: The actual performance can
be compared with the expected performance and the costs of variations
analysed. For example, if expected sale for 2013-2014 was 10000 refrigerators
and the actual sale was only 9000, one can investigate the cause for the
shortfall in the achievement. Time series analysis will enable us to apply the
scientific procedure of “Holding other things constant” as we examine one
variable at a time.
It facilitates comparison: Different time series are often compared and
important conclusions drawn their from. When such analysis is coupled
with the careful examination of current business indicators one can
undoubtedly improve substantially upon guestimates (i.e., estimates based
upon pure guess work) in forecasting future business conditions.
The following purpose is served by time series analysis (Uses of Time
series analysis)

The analysis of time series has been found useful to economists and
business persons, in particular, and also to scientists, etc., It has also found
its utility in meteorology, seismology, oceanography, geomorphology, etc.,
in earth sciences electrocardiograms, electroencephalograms in medical
sciences and problem of estimating missile trajectories.
Time series analysis helps in understanding the following phenomena.

(i) It helps in knowing the real behaviour of the past.

(ii) It helps in predicting the future behaviour like demand, production,

weather conditions, prices, etc.

(iii) It helps in planning the future operations.

(iv) Analysis of time series helps to compare the present

accomplishments with the past performances.

(v) Two or more times series can be compared belonging to the same
reference period.
The drawbacks of time series analysis:

(i) The conclusion drawn on the basis of time series analysis are not
absolutely true.

(ii) Time series analysis is unable to fully adjust the influences affecting a
time series like customs, climate, policy changes, etc.

(iii) The complex forces affecting a time series existing at certain period
may not be having the same complex forces in future. Hence the forecasts
may not hold true.
The essential requirements for proper analysis of a time series

(i) Data should be available for a long period.

(ii) The value should have been available as far as possible at equal interval of
time. If not they have to be adjusted. The adjustment of data before analysis is
called editing of data.

(iii) The time periods should be definite according to calendar.

(iv) The data should consist of a homogeneous set of values in respect of units of
measurements and time scale.
Components of Time series: It is customary to classify the fluctuations
of a time series into four basic types of variations. There are

(i) Secular Trend

(ii) Seasonal variation

(iii) Cyclical variation

(iv) Irregular variation

Trend:
A trend is observed when there is an increasing or decreasing slope
in the time series.

Trend usually happens for some time and then disappears, it does not
Repeat.

Example: some new song comes, it goes trending for a while and then
disappears.
A trend could be

• Uptrend: Time series analysis shows a general pattern that is upward then it
is uptrend.

• Downtrend: Time series analysis shows a pattern that is downward then it is

downtrend.

• Horizontal or Stationary trend: If no pattern observed then it is Horizontal

or stationary trend.
Uptrend graph:
Downtrend graph:
Horizontal or stationary trend graph:
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 consumer tastes, etc.

• For example, population increases over a period of years, prices increase over
a period of years, production of goods in the country increases over a period
of years. These are examples of upward trend.

• The sales of a commodity may decrease over a period of years because of

better products coming to market. This is an example of declining trend or
downward trend.
Secular Trend
The component of a time series attached to long term variations is term as
secular trend. Term trend implies secular trend. Trend in a time series means
long term regular movement.

The increase or decrease in the movements of a time series is called a secular trend.

This does not include short term changes but only includes steady long term
movements. So secular trend is indicative of long-term variations towards either
increase or decrease.

Example: Population growth, death rate

Uses of secular trend:

• It helps an economist in formulating his economic policies, and

planning for a country.

• It is used in making comparisons between two or more time series and

in drawing meaningful conclusions therefrom.

• It is used in the further study of the short time fluctuations of a time

series viz: season, cyclic, and irregular ones.
Significance of studying Trends
The study of trends is extremely useful because of the following reasons:

1 The study of secular trends allows us to describe historical patterns.

2. We can use past trend to evaluate success of a previous policy. Thus a

university may evaluate the effectiveness of a recruiting programme by
examining its past enrolment trends.

3. Knowledge of past can tell us a great deal about the future.

Thus the growth rate of the world’s population can help in estimating
population for some future time period.
Seasonal variation

Seasonal variations are short-term fluctuation in a time series which

occur periodically in a year. This continues to repeat year after year.

Regardless of trend we can observe that in each year more ice creams

are sold during summer season and very less during winter seasons.

More woollen clothes are sold during winter and very little in summer

months.

In these cases illustrate the effect of weather or climate conditions in

determining seasonal variations.
The sales in departmental stores is at its peak During Deepawali,
Christmas, Pongal months. This reflects the shopping customs of
consumers.
In general the period of seasonal variation refers to a year. But it
can also take place in a month or a week or a day.

For example
• Seasonal variations can be observed in the sale of books and
note-books in a bookshop during the year
• Number of persons going to temple during the days of the week
• The temperature recorded during the 24 hours of a day
Uses of Seasonal variation

1. The study and measurement of seasonal patterns constitute a very

Important part of analysis of a time series.

2. The seasonal variation may not be of immediate concern, but it must be

measured to facilitate the study of other types of variations based on
adequate statistical measure of seasonal patterns.

3. An accurate knowledge of seasonal behaviour is an aid in mitigating and

ironing out seasonal movements through business policy.

4. Seasonal indices are also helpful in scheduling purchases, inventory

control, personnel requirements, seasonal financing and selling and
advertising programmes.
Cyclical 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. There are different types of cycles of varying
length and size.

The causes of cyclical variations can be regular as well as recurring like

business cycles, seasonal changes etc,.

The ups and downs in business activities are the effects of cyclical variation.
A business cycle showing these oscillatory movements has to pass through four
phases-Prosperity, recession, depression and recovery. In a business, these four
phases are completed by passing one to another in this order.
Business cycles are characterized by boom in one period and collapse in the
subsequent period in the economic activities of a country.

These fluctuations in the economic activities are termed as phases of

business cycles.

There are basically two important phases in a business cycle that are prosperity
and depression. The other phases that are recession and recovery are
intermediary phases.
The phases of a business cycle are explained below.

Prosperity :

The growth in this phase eventually slows down and reaches to its peak. This

phase is known as peak phase. In other words, peak phase refers to the phase in

which the increase in growth rate of business cycle achieves its maximum limit.

This is also called as a bloom period.

In peak phase, the economic factors, such as production, profit, sales, and

employment, are higher, but do not increase further. In peak phase, there is a

gradual decrease in the demand of various products due to increase in the prices of input.
The increase in the prices of input leads to an increase in the prices of final

products, while the income of individuals remains constant. This also leads

consumers to restructure their monthly budget. As a result, the demand for

products, such as jewellery, homes, automobiles, refrigerators and other

durables, starts falling.

The features of prosperity are :-

• High level of output and trade.

• High level of effective demand.

• Inflation.

• Large expansion of bank credit. etc,.

Recession:

The turning point from prosperity to depression is termed as

Recession Phase.

• During a recession period, the economic activities slow down. When

demand starts falling, the overproduction and future investment
plans are also given up.

• There is a steady decline in the output, income, employment, prices

and profits.

• The businessmen lose confidence and become pessimistic

(Negative). It reduces investment.
• The banks and the people try to get greater liquidity, so credit
also contracts.

• Expansion of business stops, stock market falls. Orders are

cancelled and people start losing their jobs.

• The increase in unemployment causes a sharp decline in income

and aggregate demand. Generally, recession lasts for a short
period.
Depression:

It follows period of pessimism in trade and industry: factories close,

businesses fail, there is widespread unemployment while wages and

prices are low. These conditions characterize the period of depression.

The features of depression are :-
• Fall in volume of output and trade.
• Fall in income and rise in unemployment.
• Decline in consumption and demand.
• Deflation.
• Contraction of bank credit. etc,.
Recovery:

The turning point from depression to expansion is termed as Recovery

or Revival Phase.

• During the period of revival or recovery, there are expansions and rise
in economic activities.

• When demand starts rising, production increases and this causes an

increase in investment.

• There is a steady rise in output, income, employment, prices and

profits.

• The businessmen gain confidence and become optimistic (Positive)

and this increases investments.
• The stimulation of investment brings about the revival or recovery
of the economy.

• The banks expand credit, business expansion takes place and

stock markets are activated.

• There is an increase in employment, production, income and

aggregate demand, prices and profits start rising, and business
expands.

• Revival slowly emerges into prosperity, and the business cycle is

repeated.
Example:

• Seasonal changes in temperature: As the seasons change, the average

temperature of an area will rise and fall.

• Stock market fluctuations: The stock market is known to fluctuate in

a cyclical pattern, often following a regular pattern of highs and lows
throughout the year.

• An economic expansion during which consumer spending increases,

leading to higher demand for cars and other big-ticket items.
Manufacturers respond by increasing production and hiring new
staff, which may lead to higher prices and supply shortages.
Uses of cyclical variations

1. The study of cyclical variations are extremely useful in framing

suitable policies for stabilizing the level of business activity.

2. It is used for avoiding periods of booms and depressions as both

are bad for an economy- particularly depression which brings about
a complete disaster and shatters the economy.
The following factors are generally responsible for the occurrence of cycle:
A large number of factors are responsible for the occurrence of cycles.
But a few important ones are given below:

1. Likes and dislikes of the people change after a certain period and they
cause cycles in business phenomenon.

2. Production of certain items is stopped and new items are produced.

Again old items are adopted. Such changes form cycles.

3. Social customs change from time to time resulting into business cycles.

4. New scientific and technological developments affect the production

and consumption of items which create cycles.
Irregular variation:
• Irregular variations are irregular in the sense that it is not possible
to think of their time of occurrence, direction and magnitude.

• These variation usually occur due to epidemics, earthquakes,

floods, wars, accidents, etc.

• Another name given to irregular variations is residual variations.

This name is derived in the sense that all those variations which cannot
be in trend, seasonal and cyclical variations, are assigned to irregular
variations.
Characteristics:

• This is unpredictable

• No definite pattern

• Short period of time

• No Statistical technique
Disadvantages of irregular variations:

• It does not provide trend values for all the terms. There are no
trend values for some time periods at the beginning and at the end
of the series.

• If the fluctuations in the time series are irregular then it is difficult

to determine about the period of moving average.
Mathematical Model for time series analysis

• Additive model
• Multiplicative model
• Mixed mode.
Additive model is rarely used as it is not appropriate for future
events.
Multiplicative model:

The most commonly used mathematical model is the multiplicative

model.
Here it is assumed that any particular observation Y at time t is the
product of the effect of the four components of a time series namely,
Trend(T), seasonal variation(S), cyclic variation(C) and the irregular
variation (I),
i.e., Y= T × S × C × I.
Further the multiplicative model does not assume the independence of
the four components of the time series.
Mixed model:
A mixed model is a mathematical relation which is expressed as
a combination of multiplicative and additive components of a
time series. Such models are hardly used. Some of the examples
of mixed models are given below:

Y = T + S × C + I,
Y = T + S × C × I,
Y = T + S + C × I,
Y = T × C + S × I.