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TIME-SERIES ANALYSIS

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TIME-SERIES ANALYSIS
When data is collected, observed or recorded at successive intervals
of time, such data are referred to as Time Series i.e a Time Series
consists of statistical data in chronological order (in accordance with
time).
In time series analysis, we analyze the past behavior of a variable in
order to predict its future behavior.
When we observe numerical data at different points of time, the set
of observations are known as Time Series.
Time series analysis is one quantitative method which is used to
determine patterns in the data collected over regular intervals of time.
We project these patterns to arrive at an estimate to cope up with
uncertainty about the future.
Ex. Data of production, sales, imports etc. at different points of time.
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Good forecasts can lead to


Reduced inventory costs.
Lower overall personnel costs.
Increased customer satisfaction.

The Forecasting process can be based on


Educated guess.
Expert opinions.
Past history of data values, known as a time

series.

COMPONENTS OF
TIME SERIES
1.

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Secular Trend

The general movement persisting over a long period of time


represented by the diagonal line drawn through the irregular
curve is called Secular Trend.

The general tendency of the data to grow or decline over a


long period of time.

Sudden, Erratic and short term movements in either direction


have nothing to do with trend.

The steady increase in cost of living recorded by CPI over


time.

Example: GDP growth, population growth, prices, literacy rate


etc.
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2.

Seasonal Variations
SV are the fluctuations which completes the whole sequence of
change within the span of a year and tend to be repeated year after
year.
When a repetitive pattern is observed over some time horizon, the
series is said to have seasonal behavior.
Seasonal effects are usually associated with calendar or climatic
changes.
It includes any kind of variation which is of periodic natures &
whose repeating cycles are of relatively short durations.
SV can be because of:- Climate and weather conditions
- Increase in no of flu cases in winters
- Customs, traditions & habits.
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3. Cyclical Variations
These refers to the recurrent variations in time series that usually last
longer than a year and are regular.
Cyclical fluctuations are long term movements that represent
consistently recurring rises and declines in activity.
Most common Example: Business cycles. The time between hitting
peaks or falling to low points is at least one year or could be more.
4. Irregular Variations
Refers to variations in business activities which do not repeat in a
definite pattern.
These are variations caused by unpredictable factors like sudden
political instability, earthquakes, strikes, wars etc.
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The Trend Component


The long-term tendency is usually one of three: growth,
decline, or constant.
Reasons for trends include:

Population growth -- greater demand for products and services


-- greater supply of products and services
Technology -- impacts on efficiency, supply, and demand
Innovation -- impacts efficiency as well as supply and demand

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The Seasonal Component


Upward and downward movements which repeat at the same
time each year.
Reasons for seasonal influences include:

Weather -- both outdoor and indoor activities can impact


demand because of the number of people involved
-- supplies of products and services may depend on the
weather
Events, Holidays -- often impact supply and demand

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The Cyclical Component


Similar to seasonal variations except that there is likely not a
relationship to the time of the year.
Examples of cyclical influences include:
Inflation/deflation -- energy costs, wages and salaries, and
government spending
Stock market prices -- bull markets, bear markets
Consequences of unique events -- severe weather, law suits

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The Irregular Component

Unexplained variations which we usually treat as randomness.


These are short-term effects, usually. We treat them as
independent from one time period to the next. The length of
the duration of these effects would then be shorter than one
time period, that is, one month for monthly data, one year for
annual data.
Ex. UTTRAKHAND Flood

USES OF A TIME SERIES

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It enables us to study the past behavior of the phenomenon


under consideration. Ex: Effectiveness of recruiting prog.
Organised by University
It helps to study the components which are of paramount
importance to a businessman in the planning of future
operations and in the formulation of executive and policy
decisions.
It helps to compare the actual current performance or
accomplishments with the expected ones and analyze the
causes of such variations.
It helps us to compare the changes in the values of different
phenomenon at different places.
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METHODS OF
MEASUREMENTS
1.
2.
3.
4.

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Freehand or Graphical Method.


Semi-Average Method.
Method of Moving Averages, and
Least Squares Methods.

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FITTING OF Linear Trend


BY METHOD OF LEAST SQUARES
Let Yc=a+bX represents equation of a straight line, where:-Yc
a
b

:
:
:

represents calculated values of Y.


designates the Y-intercept.
represents the slope of the line, i.e., rate of change of
Y per unit change in X.
X
:
The X variable in time series analysis represents
time.
In order to determine the values of constants a and b, the following
two normal equations are to be solved:-

Y Na bX

XY aX bX 2
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Ques 1. Determine the trend line which best fits the following data and also find the
trend values for the given years.
Year

Sales
(in Rs. 000)

2000

35

2001

56

2002

79

2003

80

2004

40

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Sol.
Year

Sales
(in Rs. 000):
(Y)

Deviations from
middle year:
(X), i.e. 2002

2000

35

-2

2001

56

-1

2002

79

2003

80

2004

40

Y =

X= 0

X2

X2=

XY

Trend
values
Yc

XY=

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Ques 2. Given below are the figures of production (in lakh kg.) of a sugar factory.
Fit a straight line trend by the least square method and tabulate the trend. Also
estimate the trend for the year 2006.
Year

Production

1999

40

2000

45

2001

46

2002

42

2003

47

2004

50

2005

46

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Sol.
Year

Production
(Lac Kgs.):
(Y)

Deviations from
middle year:
(X), i.e. 2002

1999

40

-3

2000

45

-2

2001

46

-1

2002

42

2003

47

2004

50

2005

46

Y =

X= 0

X2

X2=

XY

Trend
values
Yc

XY=
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Ques 3. Fit a straight line trend by the method of least squares to the following
data. Assuming that the same rate of change continues what would be the
predicted earnings for the year 1980?
Year

Earnings
(Rs. cr.)

1981

38

1982

40

1983

65

1984

72

1985

69

1986

60

1987

87

1988

95

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Year

Earnings (Rs.
cr.):
(Y)

Deviations from
middle year:
i.e. 1984.5

1981

38

-3.5

1982

40

-2.5

1983

65

-1.5

1984

72

-0.5

1985

69

0.5

1986

60

1.5

1987

87

2.5

1988

95

3.5

N=8

Y =

X= 0

X2

XY

X2=

XY=

Trend values
Yc

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Qs 4. From the data given below fit a straight line trend by the method of least
squares and find the trend values. Calculate the estimated milk consumption for
the year 1997, assuming same trend continues.
Year

Milk
consumption
(million litres)

1988

102.3

1989

101.9

1990

105.8

1991

112.0

1992

114.8

1993

118.7

1994

124.5

1995

129.9
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Year

Milk
consumption
(mln. Lts) :
(Y)

Deviations
from middle
year:
i.e. 1991.5

1988

102.3

-3.5

1989

101.9

-2.5

1990

105.8

-1.5

1991

112.0

-0.5

1992

114.8

0.5

1993

118.7

1.5

1994

124.5

2.5

1995

129.9

3.5

N=8

Y =

X= 0

Multiplying
deviations by 2
(X)

X2

X2=

XY

XY=

Trend
values
Yc

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Qs 5. The following data show the experience of machine operators and their
performance ratings as given by the number of good parts turned out per 100
pieces.
Operator
experience

Performance
Rating

16

87

12

88

18

89

68

78

10

80

75

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Develop a linear trend for this data and estimate the probable performance if an
operator has 10 years experience.

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Operator
experience
(X)

Performance
Rating
(Y)

16

87

12

88

18

89

68

78

10

80

75

12

83

X=

Y =

X2

X2=

XY

XY=
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