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Trend Series 1

Trend Series Analysis I

1. There are four important bases for classification of data namely qualitative, quantitative, geographical and
chronological.  In the classification on chronological basis, the data are arranged by successive time periods, e.g., years,
quarters, months, etc.  An arrangement of data by successive time periods is called a‘time series’.
2. A time series is a sequence of observations obtained as successive time periods.
3. Examples of time series are:

·        Annual yield of a crop in a country for a number of years,

·        Annual profit before tax of a firm,

·        Daily temperature of a city,

·        Annual rainfall of a country,

·        Total monthly sales receipts in a departmental store,

·        Daily closing prices of a share on the stock exchange,

·        Annual balance of trade of a country,

·        Weekly consumer price index number, etc.

4. Basically, there are two objectives of time series:

(a)   to examine the patterns of change over time, and

(b)   to use these patterns to forecast and predict future values.

Graph of a Time Series – Histogram:

A time series trend is graphically presented by plotting observed values against corresponding time points and joining these
points by straight lines.  This graph is commonly known as ‘Histogram’.

Example 1:

Plot the following observed values on a graph:

Table I – Quarterly Sales (In million Rs.)

Time Sale

2003 I 219

  II 357

  III 645

  IV 513

2004 I 549

  II 640

  III 701

  IV 590

2005 I 657
   II 394

  III 543

  IV 600

Solution:

Signal and Noise:

1. Time series may be considered as made up of two types of sequences, i.e., signal and noise.  The sequence which follows
some regular patterns of variation and can be completely determined or specified is called the ‘systematic
sequence’ or ‘signal’.
2. The sequence following random or irregular patterns of variation is called ‘noise’.
3. Let the values of time series variable Y be Y1, Y2, ………., Yn observed at equal intervals of time t1, t2, …………, tn, then the
time series may be represented by the model:

Y = f(t) + U

Where Y           :           time series variable,

            f(t)       :           systematic sequence signal, and

            U         :           random sequence noise.

Components of a Time Series:

The change or variations in the observations of a time series are due to one or more of the four factors called ‘components of the
time series’ or ‘characteristic movements of a time series’.  These components  are:

(a)    Secular trend (T)

(b)   Seasonal variations (S)

(c)    Cyclical variations (C)

(d)   Random variations (R)

(a)   Secular Trend (T): The word ‘secular’ is used to mean ‘long-term’ or ‘relating to long periods of time’.  Thus, the secular
trend refers to the movement of a time series in one direction over a fairly long period of time.  The movement is smooth,
steady and regular in nature.  Such a movement characterises the general pattern of increase or decrease in an economic
or social phenomenon.

(b)   Seasonal Variations (S): Such movements refer to short-term variations which a time series usually follows during
corresponding months or seasons of successive years.  It is refer to any variation of repeating nature, within a period
of one year, caused by recurring events.  For example, increased demand for woollen clothes during winter, increased
sales at a departmental store before Eid, increased sale of candies before Christmas, etc.

(c)    Cyclical Variations (C): Such movements refer to long-term oscillations or swings about the trend line or curve.  Since
the movements take the form of upward and downward swings, they are also called ‘cycles’.  The movements are
considered cyclical only if they recur after a period of more than one year. The term ‘cycle’ is used for ‘business cycle’,
which is consist of four phases, i.e., prosperity recession, depression and revival.

(d)   Random Variations (R): These movements refer to fluctuations of irregular nature caused by chance events such as
war, flood, storm, earthquake, accidents, strikes, etc.  They are also known
as ‘irregular’, ‘accidental’ or ‘erratic’ movements.
The first three components, i.e., secular trend, seasonal variations and cyclical variations, follow regular patterns of variation,
therefore, fall under signal.  While the random variations follow irregular patterns of movements, therefore, it falls under noise.

Analysis of Time Series / Time Series Model:

1.      An approach to represent time series data is to multiply the four components .  this is called ‘Multiplicative Time Series
Model’:

Y=T×C×S×I

Where Y           :           observed value of a time series at a particular time point

            T          :           Trend (secular)
            C         :           Cyclical variations
            S          :           Seasonal variations
            R or I   :           Irregular or random variations

2.      The second approach is based on additive law, known as ‘Additive Model’:

Y=T+C+S+R

3.      This analysis is often called the ‘decomposition’ of a time series into basic component movements.

Measurement of Secular Trend:

(a)    Freehand curve method,

(b)   Semi-averages method,

(c)    Moving-averages method, and

(d)   Least-squares method.

Freehand, semi-averages and moving averages methods are used to study the pattern of change over a long period of time.  They
remove the short-term changes or smooth out the series.  Least squares method is used to forecast the future values.

(a)   Freehand Curve Method: In this method the data are plotted on a graph measuring the time units (years, months,
etc.) along the x-axis and the values of the time series variable along the y-axis.  A trend line or curve is drawn through the
graph in such a way that it shows the general tendency of the values.

Example 2:

Take the data from Example 1, and plot the observed on a graph and draw a trend line using ‘freehand curve method’.

Solution:
 (b)   Semi-Averages Method: In this method, the data are divided into two parts.  If the number of values is odd, either the
middle value is left out or the series is divided unevenly.  The averages for each part are computed and placed against the
centre of each part.  The averages are plotted and joined by line.  The line is extended to cover the whole data.

Example 3:

For the following data, calculate the trend values and plot them on a graph using ‘semi-averages method’:

Table II
Pakistan’s Per Capita Income (In Rs.)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

PCI 15522 17393 18901 20377 25244 27227 28769 31572 35196 41008

Solution:

Semi Semi Trend

Year PCI Total Average Value

1996 15522     14180.6

1997 17393     16834.0

1998 18901 97437 19487.4 19487.4

1999 20377     22140.8

2000 25244     24794.2

2001 27227     27447.6

2002 28769     30101.0

2003 31572 163772 32754..4 32754.4

2004 35196     35407.8

2005 41008     38061.2

Note:

Difference between semi-averages: 32754.4 – 19487.4 = 13267

Average increase in income per year: 13267 ÷ 5 = 2653.4

Trend values for 1997: 19487.4 – 2653.4 = 16834

Trend values for 1999: 19487.4 + 2653.4 = 22140.8

(c)   Moving-Averages Method: Moving averages method is appropriate only when the trend is linear.  It is also used to
eliminate seasonal, cyclical and irregular fluctuations in the data.  In this method, we find the simple average successively
taking a specific number of values at a time.  For e.g., if we want to find 3-year moving average, we shall find the average
of the first three values, then drop the first value and include the fourth value.  The process will be continued till all the
values in the series are exhausted.

Example 4:

For the following data, calculate 3-year and 5-year moving averages and plot them on a graph using ‘moving-averages method’:

Annual GDP Growth Rate (in percent)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% 6.6 1.7 3.5 4.2 3.9 1.8 3.1 4.8 6.4 8.4

Solution:

3 year 3 year 5 year 5 year

Year Values moving moving moving moving
total average total average

1996 6.6        

1997 1.7 11.8 3.93    

1998 3.5 9.4 3.13 19.9 3.98

1999 4.2 11.6 3.87 15.1 3.02

2000 3.9 9.9 3.3 16.5 3.3

2001 1.8 8.8 2.93 17.8 3.56

2002 3.1 9.7 3.23 20 4

2003 4.8 14.3 4.77 24.5 4.9

2004 6.4 19.6 6.53    

2005 8.4        
(d)   Least Squares Method: The method of least squares states that of all the curves which can possibly be drawn to
approximate the given data, the best fitting curve is the one for which the sum of squares of deviations is the least.

Method of least squares is used to fit a linear trend given by the straight line and non-linear trend given by a second and
higher degree curves.  In this method, an algebraic equation is fitted to the observed data.  This equation may be linear,
quadratic or exponental depending upon the pattern of time series graph.
 Continued

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