Time Series Analysis and

Index Numbers Chapter 3

BMT 1063
Business Statistics

Mr.V.Jeniston Delima
Senior Lecturer
Trincomalee Campus
Eastern University, Sri Lanka
Time Series Analysis and Index Numbers 1
Contents
1. Time series analysis
2. Index Numbers and its applications

Time Series Analysis and Index Numbers 2

Learning Outcomes
At the end of this chapter, you will be able to:
• Define the components of a time series.
• Determine the linear trend equation.
• Compute a moving average.
• Use a trend equation to forecast future time periods and to develop
seasonally adjusted forecasts.
• Understand different index numbers and apply the concept to
problems.

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Time Series Analysis - Definition
• A time series is a set of observations taken at specified times, usually
at equal intervals.
• A time series may be defined as a collection of reading belonging to
different time period of same economic variable or composite of
variables

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Components of Time Series
• There are various forces that affect the values of a phenomenon in a
time series; these may be broadly divided into the following four
categories, commonly known as the components of a time series.
(1) Long term movement or secular trend or simple trend
(2) Seasonal variations
(3) Cyclical variations
(4) Random or irregular variations

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Long term movement or secular trend or
simple trend
• The general tendency of a data to increase or decrease or stagnate over
a long period of time is called secular trend or simple trend.
• Most of the time series relating to Economic, Business and Commerce
might show an upward tendency in case of population, production &
sales of products, incomes, prices; or downward tendency might be
noticed in time series relating to share prices, death, birth rate etc. due
to global melt down, or improvement in medical facilities etc. All
these indicate trend.

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Seasonal Variations
• Over a span of one year, seasonal variation takes place due to the
rhythmic forces which operate in a regular and periodic manner. These
forces have the same or almost similar pattern year after year.
• Seasonal variations could be seen and calculated if the data are
recorded quarterly, monthly, weekly, daily or hourly basis. So if in a
time series data only annual figures are given, there will be no
seasonal variations.

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Seasonal Variations (Cont.)
• The seasonal variations may be due to various seasons or weather
conditions for example sale of cold drink would go up in summers &
go down in winters. These variations may be also due to man-made
conventions & due to habits, customs or traditions. For example sales
might go up during Diwali & Christmas or sales of restaurants &
eateries might go down during Navratris.

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Cyclical Variations
• These variations in a time series are due to ups & downs recurring
after a period from time to time.
• Though they are more or less regular, they may not be uniformly
periodic. These are oscillatory movements which are present in any
business activity and is termed as business cycle.
• It has got four phases consisting of prosperity (boom), recession,
depression and recovery. All these phases together may last from 7 to
9 years may be less or more.

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Cyclical Variations (Cont.)

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Random or Irregular Variations
• These fluctuations are a result of unforeseen and unpredictably forces
which operate in absolutely random or erratic manner.
• They do not have any definite pattern and it cannot be predicted in
advance. These variations are due to floods, wars, famines,
earthquakes, strikes, lockouts, epidemics etc.

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Question
• Associate each of the following with the appropriate component of
time series model:

1. The impact of a strike

2. An economic cycle of ups and downs over 5 years
3. A long-term increase of 5% per annum
4. An increase in sales over Christmas

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Models of Time Series Analysis
• The following are the two models which are generally used for
decomposition of time series into its four components. The objective is
to estimate and separate the four types of variations and to bring out
the relative impact of each on the overall behavior of the time series.
1. Additive model
2. Multiplicative model

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Additive Model
•

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Multiplicative Model
•

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Measurement of Secular Trend
• The following are the methods most commonly used for studying &
measuring the trend component in a time series:
(1) Graphic or a Freehand Curve method
(2) Method of Semi Averages
(3) Method of Moving Averages
(4) Method of Least Squares

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Graphic or Freehand Curve Method
• The data of a given time series is plotted on a graph and all the points are joined together with a straight
line. This curve would be irregular as it includes short run oscillation. These irregularities are
smoothened out by drawing a free hand curve or line along with the curve previously drawn.
• This curve would eliminate the short run oscillations & would show the long period general tendency
of the data. While drawing this curve it should be kept in mind that the curve should be smooth and the
number of points above the trend curve should be more or less equal to the number of points below it.
Merits
(1) It is very simple and easy to construct.
(2) It does not require any mathematical calculations and hence even a layman can understand it.
Disadvantages
(1) This is a subjective concept. Hence different persons may draw free hand lines at different positions
and with different slopes.
(2) If the length of period for which the curve is drawn is very small, it might give totally erroneous
results.

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Method of Semi Averages
• Under this method, the whole time series data is classified into two
equal parts and the averages for each half are calculated.
• If the data is for even number of years, it is easily divided into two.
• If the data is for odd number of years, then the middle year of the time
series is left and the two halves are constituted with the period on each
side of the middle year.
• The arithmetic mean for a half is taken to be representative of the
value corresponding to the mid point of the time interval of that half.
• Thus we get two points. These two points are plotted on a graph and
then are joined by straight line which is our required trend line.
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Moving Average Method
• A moving average is an average (Arithmetic mean) of fixed number of items
(known as periods) which moves through a series by dropping the first item of
the previously averaged group and adding the next item in each successive
average.
• The value so computed is considered the trend value for the unit of time
falling at the centre of the period used in the calculation of the average.
• In case the period is odd- If the period of moving average is odd for instance
for computing 3 yearly moving average, the value of 1st, 2nd & 3rd years are
added up and arithmetic mean is found out and the answer is placed against
the 2nd year; then value of 2nd, 3rd & 4th years are added up & arithmetic
mean is derived and this average is placed against 3rd year (ie. the middle of
2nd, 3rd & 4th) and so on.
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Moving Average Method (Cont.)
• In case of even number of years - If the period of moving average is
even for instance for computing 4 yearly moving average, the value of
1st, 2nd, 3rd & 4th years are added up & arithmetic mean is found out
and answer is placed against the middle of 2nd & 3rd year.
• The second average is placed against middle of 3rd & 4th year. As this
would not coincide with a period of a given time series an attempt is
made to synchronize them with the original data by taking a two period
average of the moving averages and placing them in between the
corresponding time periods.
• This technique is called centering & the corresponding moving averages
are called moving average centred.
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Exercise 1
1. The wages of certain factory workers are given as below. Using 3
yearly moving average indicate the trend in wages.

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018
Wages 1,200 1,500 1,400 1,750 1,800 1,700 1,600 1,500 1,750

2. Calculate 4 yearly moving average of the following data

Year 2011 2012 2013 2014 2015 2016 2017 2018

Wages 1,150 1,250 1,320 1,400 1,300 1,320 1,500 1,700

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Method of Least Squares
•

Y= Predicted value of the dependent variable

a = Y axis intercept or the height of the line above origin
(i.e. when X = 0, Y = a)
b= slope of the regression line (it gives the rate of change in Y for a given change in X)
(when b is positive the slope is upwards, when b is negative, the slope is downwards)

x= independent variable (which is time in this case)

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Method of Least Squares (Cont.)
• Use these equations to derive time series regression model.

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Exercise 2
Fit a straight line trend to the following data by Least Square Method and obtain a
seasonally adjusted trend estimate of sale for the 4th Quarter of 2019:
Year Quarter Sales (Rs.000)
2016 1 20
2 30
3 39
4 60
2017 1 40
2 51
3 62
4 81
2018 1 50
2 64
3 74
4 95
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Example 3
• Quarterly data for the number of customers for Eastern Electronics are
shown here. Compute the trend line and the seasonal indexes for each
quarter.
Year Quarter Revenue Year Quarter Revenue 1. Using the ratio to moving
average method, calculate
2014 1 215 3 451 seasonally adjusted index
2 253 4 652 for each quarter.
2. Obtain a regression trend
3 351 2016 1 587
line representing the
4 398 2 571 above data
2015 1 366 3 569 3. Obtain a seasonally
adjusted trend estimate
2 471 4 588 for the 4th quarter of 2017.
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Exercise 4
• Tourist industry is subject to seasonal variation. A hotel has recorded the occupancy rate for each
quarter for 5 years. Measure the seasonal variation by computing the seasonal indexes and what
are occupancy rate for four quarters of 2019.
Year Quarter Occupancy Rate Year Quarter Occupancy Rate
2014 1 0.561 4 0.600
2 0.702 2017 1 0.622
3 0.800 2 0.708
4 0.568 3 0.806
2015 1 0.575 4 0.632
2 0.738 2018 1 0.665
3 0.868 2 0.835
4 0.605 3 0.873
2016 1 0.594 4 0.670
2 0.738
3 0.729
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2. Index Number and Its Applications
Definitions
• An index number is a ‘relative number’ which expresses the
relationship between two variables or two groups of variables where
one of the group is used as base.
• An index number is a statistical measure designed to show changes
invariable or a group of related variables with respect to time,
geographic location or other characteristics.
• An index number is a statistical measure of fluctuation in a variable
arranged in the form of a series and a base period for making
comparisons.
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Uses of Index Number
• Index Numbers are the economic barometers
• Index number helps in formulation of policy decisions
• Index numbers reveal trends and tendencies
• Index numbers help to measures the Purchasing power of money
• Consumer price indices are used for deflating

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Problems Involved in Construction Index
Number
• A clear definition of the purpose for which the index is constructed
should be made
• Selection of number of items
• Base period
• Selection of weights
• Adoption of suitable formula for construction of index number

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Methods of Construction of Index Number
• Index numbers may be constructed by any of the following methods—
(1) Unweighted Index :
(a) Simple Aggregative Index
(b) Simple Average of Price Relatives
(2) Weighted Indices:
(a) Weighted Aggregative Index
(b) Weighted Average of Price Relatives

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Unweighted Index: Simple Aggregate
Method
•

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Exercise 5
• From the following data construct a price index for year 2018 taking
year 2015 as base.
Commodities Price in 2015 Price in 2018
Potato (per Kg) 12 20
Wheat (per Kg) 20 25
Bread 10 13
Cheese (per Kg) 8 10

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Unweighted Index: Simple Average of
Price Relative Method
• Under this method the price of each commodity in the current year is
taken as a percentage of the price of corresponding item of the base
year and the index is obtained by averaging these percentage figures.
• Arithmetic mean or geometric mean may be used to average these
percentages.

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Unweighted Index: Simple Average of
Price Relative Method (Cont.)
•

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Exercise 6
• From the following data construct an index for 2018 taking 2017 as base by Price
Relative method using
(a) Arithmetic Mean
(b) Geometric Mean
for averaging relatives:
Commodities Price in 2017 Price in 2018
A 8 12
B 6 8
C 5 6
D 48 52
E 15 18
F 9 27
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Weighted Index: Weighted Aggregate
Method
•

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Weighted Index: Weighted Aggregate
Method (Cont.)
•

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Weighted Index: Weighted Aggregate
Method (Cont.)
•

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Example 7
• Compute the price index as per the following methods:
1. Laspeyres’ method
2. Paasche’s method
3. Dorbish and Bowley’s method
4. Fishers’ method
From the following
Item
A 10 4 12 6
B 15 6 20 4
C 2 5 5 3
D 4 4 4 4
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Weighted Index : Weighted Average of
Relative Method
• In this method, price of each commodity in the current year is taken as
a percentage of the price of corresponding item of the base year.
• These relatives are multiplied by the given weights and the result is
obtained by averaging the resulting figures.
• Arithmetic mean or geometric mean is used to average these figures.

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Weighted Index : Weighted Average of
Relative Method
•

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Example 8
• Compute price index by Weighted Average of Relatives using—
1. Arithmetic mean
2. Geometric mean

Items Price in 2017 Price in 2018 Quantity in 2017

A 5 6 2
B 4 5 0.25
C 15 16.5 1

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Thank You
Any Questions?

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