3.2. DEFINITION: ‘Time series is the arrangement of statistical data in chronological order that is in accordanc with time. i. Time series data is nothing but the data collected over a period of time. Th quantitative values are recorded over equal time interval like daily, weekly, monthly, quartet half yearly, yearly, or any other time measure. For example: (2) Monthly Industrial Production in India, (2) Annual birth-rate figures for the’given state, (3) Yield from particular shares during the month, (4) Monthly wholesale price of wheat,(5) Daily records of sales in a departmental stores, (6) Census data, (7) Daily records of maximum temperature of a given city.” A time series represents the relationship between the two variables, one of them being time. The purpose of time series analysis is to see what changes take place over the time in the event under observation. 33 USES OF TIME SERIES: The analysis of time series is of great significance not only to the economists and business man put also to the scientists, astronomists, geologists, sociologists, biologists, research worker etc. for the reasons below. (1) 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. It helps in planning future operations: The major use of time series analysis is in the theory of forecasting. The analysis of the past behaviour enables to forecast the future. Time series forecasts are useful in planning, allocating budgets in different sectors of economy. () Ie helps in evaluating current accomplishments: The actual performance can be compared with the expected performance obtained from the analysis and the cause of variation can be analyzed. If expected sale for 2009 was 10000 refrigerators and the actual sale was only 9000. One can investigate the cause for the shortfall in achievements. (4) It facilitates comparison: Different time series are often compared and important conclusions are drawn from there. E.g. By comparing sales of two products produced by company, one can take the decisions. Or in business administration it is essential to compare the output by different departments for the allocation of resources. Analysis of time series shows that the observed time values of the variables are always fluctuating from time to time, The fluctuations are due to various factors or forces like increase of population, changes in habits and tastes of people, weather conditions etc. Therefore, the first task is to break down the data and study each of these influences in isolation. This is known as decomposition of the time series. It enables us to understand fully the nature of the forces at work. We can then analyse their combined interactions. Such a study is known as time-series analysis. The purpose of time series analysis is to isolate and ascertain these forces (i.e. various components). 34 COMPONENTS OF THE TIME SERIES: Fluctuations in a time series are mainly due to four basic types of variations known as components or elements of time series. These are: (a) Secular Trend (T) (b) Seasonal Variation (S) (©) Cyclical variation or periodic variation (C) (d) Irregular or Random movements (R) ‘These components provide a basis for the explanation of the past behaviour and help us to predict the future behaviour. A value of time series Yt at any time t is regarded as the function of the combined impact of above components.c) 5 3.4.1 Secular Trend (o1) Trend (1): the general tend ney oF population or mS By secular trend or simply trend we aoe usually see ae ore or less constant for a} fi i eriod of time. e.g ich are nae aan cee aa the effect of such factors 7 i not include short es te alee fine oF wicca very graally and slowiy. Trend ee factors are gradual son eri t due but rather the steady movements over a long p' rial outpul : : | Population, tastes oa habits or the effect on ae ase in production of ink pens, Tadio ae Increase in production of automobiles and a gradual de examples of increasing and decreasing secular trend. sti All basic trends are not of the same nature. eae jah line wi This type of trend movement takes the form of a str i nt percell { . on a graph paper. Sometimes the trend will be ca an ee are plotted on a semi-logatitin, type takes the form of a straight line when the bien #5 curves", ett. chart. Other types of trend encountered are “logistic”, : end, constant trend or noy Generally we observe linear trend -upward trend, downward tr linear trend. of the data to incre, there is tendency of constant groyy i hen the trend values are Plotteg tage increase or decrease, This Upward trend: (1) Agricultural production. (2) Yearly population. (3) Number of graduates. Downward trend: ) Cost of electronic goods, (2) Death rates, (3) Number of illiterates, Constant trend: Seer > () Daily temperature in (2) Atmosphe: G) Monthly electrical consumption of family, a season. tic pressure,Non linear trend: (1) Share price. (2) Life time of an electronic device, - Fig. 1: Types of trend Properly recognizing and accurately measuring basic trends is one of the most important problems in time series analysis. Trend values are used as the base from which other three movements are measured. Therefore, any inaccuracy in its measurement may vitiate/spoil the entire work, The elements controlling trend growth are relatively stable. Trends do not commonly change their nature quickly. It is therefore reasonable to assume that a representative trend, which has characterized the data for a past period, is prevailing at present, and that it may be projected into the future for a year or so. 3.4.2 Seasonal Variation (S): Seasonal variation is a short term periodic movement which occurs more or less regularly within a specified period of one year or shorter. It reoccurs periodically year after year. The major factors that cause seasonal variations are climatic and weather conditions, customs and habits of people, religious festivals etc. Fig. 2: Seasonal Variations Eg. The sales of the departmental store show sudden rise before Durga pooja, Diwali and Christmas. The prices of grain vary between the harvest and the non harvest seasons. A business executive has to study seasonal variations in order to take care of policy decisions regarding, inventory, purchase, sale schedule etc. Although the period of seasonal variations refers to a year, in a business and economics it can also be taken as a month, week, day, or hour depending on the nature of characteristic under study. E.g. withdrawals in a bank, temperature recorded during 24 hrs, Note that the amplitude may differ from cycle to cycle. 3.4.3 Cyclical Variations (C): Apart from seasonal variations, there is another type of fluctuation which usually lasts for More than a year. Cyclical fluctuations are a long term periodic movement which occurs over a long period of time usually two or more years. It is oscillatory in nature but not as regular asSeasonal variation. The cyclic movements in a time series are generally attsDoNES of po ret Business Cycle’ which may also be referred to as the ‘four phase cycle’ comms IEN Say, tecession, depression and recovery. Each phase changes gradually into a bead given above until one business cycle is completed. (Fig 3) ie business cycle does not recur regulaily like seasonal movement, : causes which develop intermittently out of complex combinations of economic and i considerations. When the business of a country or a community is above oF De mal, the excess deficiency is usually attributed to the business cycle. Peak Steady Growth Line Jat moves in response ty Expansion Recession Expansion Prosperity Line of Cycle Recovery Trough Fig. 3: Business cycle Many people confuse cyclic behaviour with seasonal behaviour, different. If the fluctuations are not of fixed period then they are cyclic; if the period is unchanging and associated with some aspect of the calendar, then the pattern is seasonal. In general, the average length of cycles is longer than the length of a seasonal pattern, and the magnitude of cycles tends to be inore variable than the magnitude of seasonal patterns, : 3.4.4 Random or Irregular Movements (R): 7 Such variations are caused by the factors of irregular nature. nature and are unpredictable, regulnr movements are qnores by eae Purely, rondo wars, earthquakes, strikes etc. These variations do not occur in a definite events like floo oe excluding trend, seasonal and cyclical variations are irregular, Pattern. All variatiog but they are really quite Fig. 4: Random movements35 ANALYSIS OF TIME SERIES: Analysis of time series means ~ study of time serics. The main purpose in a time series analysis is two fold. (2) To identify the forces or components whose net effect is exhibited in the movement of time series, (2) Toisolate, study, analyse and measure them independently. Models for time series: In the analysis it is essential to know how the components interact and show the joint effect. This is done with the help of the models. Generally two models are used to describe a time series. @ Additive Models: According to this model a time series can be expressed as WaT +S + Cr+ Re That is all components of time series are additive in nature. It assumes that the four components have no interaction so they act independently. The term & will not appear in a series of annual data. C; will have positive or negative values depending on whether we are above normal or below normal phase. The assumption in the additive model that the components are non-interactive or they act independently is not realistic."In order to overcome this drawback multiplicative model is developed. (i) Multiplicative Model: In this model it is assumed that the various components in a time series operate proportionately to the general level of the series. Accordingly the model can be expressed as Yee Tex Sex Cr Re Where S,, C,, R: instead of assuming positive or negative values are indices fluctuating above or below unity and the geometric means of S; in a year, Cr in a cycle and R; in a long term period are unity. Note: multiplicative model can be converted to additive model by using log transformation. In this chapter we will study the measurement of two components namely-trend and seasonal variation. 3.6 MEASUREMENT OF TREND: The reasons for the measurement of Trend, is to study the behaviour of the variable in the Jong run. . Trend can be measured by the following four methods. (1) Graphic Method (2) Semi-average Method (3) Moving average Method (4) Method of Least Square 3.6.1 Graphic Method or Free hand curve method: Itis the simplest method of studying trend. In this method the values of Y: (a time dependent variable) aré plotted against t and a smooth curve is drawn through these points. It enables us to form an idea about the general trend of the series. Smoothing of the curve eliminates otheri does 1 sauPoRents such as regular Auctuations. This. method joints of this method. mathematical calculations hence simplicity and flexibility are strong P Fig. 5: Graphical method Example 1: Following data represents Production of Rice( in ‘000 tones) for the years 2000 to 2097 Observe trend by graphical method. Year Production of Rice in '000 tones 2000 120 2001 135 2002 345 2003 412 2004 720 2005 900 2006 1100 2007 1040 Solution: Draw the graph. Y ‘ Production of Rice in ‘000 tones 1400 1200 1000 e00 Given Data Points 600 ] Trend 200 ‘ 2 Mig. 6: Graph showing trend -We observe the upward trend, Merits: (i) Itis very simplest method for studying trend values and itis easy to draw trend. (ii) Sometimes the trend line drawn by the statistician experienced in computing trend may be considered better than a trend line fitted by the use of a mathematical formula. Demerits: () This method is highly (i) Since the method is subjective, the prediction may not be reliable. ubjective and curve varies from person to person who draws it. (ii) The work must be handled by skilled and experienced people. fiv) Ttdoes not enable us to measure trend. 3.6.2 Semi-Average Method: In this method given data is first divided into two parts (preferably equal) and an average for each part is found. Then the two averages are plotted on the graph paper as points against the mid-point of the time interval covered by the respective two parts. These two points are joined by astraight line. This line is the required trend line. If the data contains n-even number of data points then easily data can be divided into two parts each containing 5 points. In case n is odd then we omit middle value and divide data in to ‘0 equal parts. Example 2: Following data represents students strength in the college ABC for the years 2004 to 2009. Observe trend by Semi-Average method. [ Year 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |’ Students’ strength in ABC college | 450-| 560 | 580 | 540 | 720 | 850 Solution: Here data contains observations for six years so we divide it in two parts. [Year | Students' strength in ABC college Semi averages 2004 450 2005 560 SOE Se SH = 530 2006 580 2007 540 2008 720 S40 + 720+ 850 = 703.33 2009 850Students’ strength In ABC college 900 7 800 + > Given Data 600 Trend fine joining semi average points 2004 2005 2006 2007 2008 2009 Fig, 7: Trend line by method of semi averages Merits: (i) This method is simple to understand as compared to moving average method and method of least squares. (ii) This is an objective method of measuring trend.as everyone who applies this method is bound to get the same result, so it is better than graphical method which is subjective. Demerits: 7 (i) The method assumes straight line relationship between the plotted points regardless of the fact whether that relationship exists or not. (i) The main drawback of this method is if we add some more data to the original data then whole calculation is to be done again for the new data to get the trend values and the trend line also changes. (iii) As the A.M of each half is calculated, an extreme value in any half will greatly affect the points and hence trend calculated through these points may not be precise enough for forecasting the future. 3.6.3 Moving Average Method: Moving average of period m is a series of successive averages of m terms at a time starting with 1*, 24, 34 term etc. Thus the first average is the mean of 1st m terms, the 24 is mean of terms from 2r4 to (m+1)t term and so on. Suppose we have the following time series. - Time thy tay tay vee wa ta Y values Yi, Y2, Ya,» Yn If we want to calculate moving average of period m. Then series of moving averages § calculated as follows: Yat Yor ont Yn m Yor Yat... + Yor m First moving average = Second moving average = Ys+ Yat +¥ms2 ‘Third moving average = =Merits: ) This me i) The calculations are simple. ii) If an appropriate period is chosen that is if the period of the the period of cyclical fluctuations then these fluctuations are data by using this method. (in) The choice of period of moving average is made by observin; the data and not by personal judgment of the sabofaction. () The method is quite flexible in the sense that when a few observations are added to the given data, the trend values already obtained will not be affected, only more trend values will be included in the series. Demerits: @ Some trend values at the beginning and at the end of the series cannot be determined. (ii) Ttis not easy to determine the period of moving average when the oscillatory movement does not exhibit any regular periodic cycle. . (ii) It cannot be used for forecasting or predicting future trend, which is the main objective of trend analysis. (iv) This method is used to find only linear trend. thod is used to measure trend, seasonal, cyclical and irregular fluctuations. moving average coincide with automatically eliminated from g the oscillatory movements in3.6.4 Method of Least Squares: This method yields correct 1 of the function to be fitted is obtained ei by screening of the graphical plot er ee time or by a theoretical understanding of thy mechanism of the variable change. On examination, the plotted data often provides an adequay, basis for deciding upon the type of the trend to use. The following are types of fitting of curves, . (D Fitting of a straight line Yi =a + bt i _ To estimate the parameters ‘a’ and ‘b’, we solve the following normal equations obtained by minimising the error sum of squares (SE2). Let S=SE =r(Y-a- bt)? =0=-2E(%-a-bt)=0 = E¥r=na+b3t (1) as: Gp =0>-2E(-a-bijt=0 => EY: = alt + bre -(2) By solving equations (1) and (2) as simultaneous equations we get the values of a and b, with these values we can write equation of trend line Y; = a + bt for the given data. (I) Fitting of parabolic curve or second degree equation. Yi satbt+ct? To estimate the parameters ‘a’ and ‘b’, we solve the following normal equations obtained by minimising the error sum of squares. $?=SE? =Z(¥-a-bt-ct? ast Gy 0-2 B(%r-a-bt-c) =0 | => EY, =na+bSt+ cht (1) as? Gp =O -2E-a-bt-cejt=0 => Et =abt+bE+cze (2) ase — = od -a—bt-ct2fS Ge =O -2E(Kr-a—bt-et?|F=0 = ERY, salP+bEP+crt 3) By solving equations (1),(2) and (8) as simultaneous equations we get the values of a, b and with these values we can write second degree equation of trend Yi = a + bt + ct? for the give data. Merits: (i) This is a mathematical method of measuring trend (i) Trend values can be obtained for all the given time periods in the series,Demerits: () Great care should be exercised in selecting the type of trend curve to be fitted i.e. linear, parabolic or some other type. Carelessness in this respect may lead to wrong results. Gi) The method is more tedious and time consuming. (ii) Predictions are based on only long term variations ie trend and the impact of cyclical, seasonal and irregular variations is ignored. x Gv) This method can not be used to fit the growth curves like Gompertz curve \Y=Ka? ), fet 1 logistic curve @ = mem) etc. Example 5: Following data represents the produétion of sugar in the given factory. Year 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 Production in ‘000 quintals | 55. 60 65 67, 70 78 cc 80 82 87 82, 78 85. () Fita straight line trend and calculate trend values. i) Piot the data on the graph and show the trend line. Solution: Year Y= Production in ‘000 quintals. | t= year-2008 ty e trend values 2002 55 -6 -330 | 36 60.17 2003 60 5 300 | 25 625 2004 65 4 260 | .16 64.83 2005 67 3 -201 | 9 67.16 2006 70 2 -140 | 4 69.49 2007 78 -1 at 71.82 2008 75 0 o | o 74.15 2009 80 1 go | 1 76.48 2010 82 2 164 | 4 78.81 2011 87 3 261 | 9 81.14 212 82 4 328 | 16 83.47 m3 78 5 300 | 25 858 2014 85 6 510_| "36 88.13 Tol 964 0 424 | 182 For fitting of a straight line Y; =a + bt, we have to solve the normal equations ZY, =na + bEt EtY, = abt + bE‘? ie, DY; =na + brt = 964 13a+0xb=>a=74.15 i 182b => b = 2.33 ile, DEY; = abt + BEEP = 42 =ax0+ feat pation for the trend line is Yt = 74.15 + 2.33t = 74.15 + 2.33 (year-2008).Y Production in ‘ooo quintals. Given Data Trending Op} ttt X 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 X . t) Fig. 10: Trend line by method of least square 3.7 MEASUREMENT OF SEASONAL VARIATION: Seasonal variations are measured as a percentage of ,the trend rather than in absolute quantities. The seasonal index for any month (week, quarter etc.) may be defined as the ratio of the normally expected value (excluding the business cycle and erratic movements) to the corresponding trend value. When cyclical movement and erratic fluctuations are absent in a time series, such a series is called normal. Normal values thus are consisting of trend and seasonal components. Thus when normal values are divided by the corresponding trend values, we obtain seasonal component of time series. Seasonal patterns are exhibited by most of the business and economic phenomena and theit study is necessary for the following two reasons. (Q) To isolate the seasonal variation that is to determine the effect of seasons on the size of the variable. (2) To eliminate them that is to study as to what would be the value of the variable if there were no seasonal fluctuations. To study the seasonal variates the data must be given for parts of the year (month terly, weekly, daily or hourly). Followi i : aad rb iy. weekly, daily or hourly). Following are the different Ways of measuring season (1) Method of simple average (2) Ratio to trend method (3) Ratio to moving average method (4) Link relative method3.71 Method of Simple Average: : This is the simplest of computing’ seasonal variation and this method is used when trend and cyclical fluctuations if any have little effect on the time series. Let the data be given for n periods (where n can be yearly, monthly, quarterly etc.) (1) Average the data Periodically (2) Let Xi, be the average of the ith period (I= 1,2,... n) Ss -_3 (3) Compute the average X of these n averages that is X == (4) If we assume additive model, then seasonal indices for n periods are %1-X , %—K ..-%a— x, If we assume multiplicative model, then seasonal indices for n periods are © x10, x Merits: sad @ Thisis the simplest method of all the methods. 3 Demerits: @ This method is based on the basic assumption that the data do not contain any trend and cyclic components and consists in eliminating irregular components by averaging the monthly (or quarterly) values over the years. Since most of the economic time series has trends, these assumptions in general are not true and hence this method is not of much practical utility. (i) The seasonal indices obtained by this method are rough estimates, Example 6: Determine seasonal indices for various quarters by using simple average method, Year! 008 | 2009 | 2010 | 2011 Quarter T 152 157 162 135 0 187 | 148 165 150 ir 154 157 153 154 Iv 158 156 148 152 Solution: We have to evaluate quarterly averages x then the average of averages X, Then calculate seasonal indices by using formula ~! x 100Quarter 1 lt iis 1 : Year 2008 152 157 154 = 2009 187 148 187 156 2010 162 165 153 48 2011 135 150 154 152 Total 606 620 618 614 Quarterly average 151.5 155 154.5 Te 5 Seasonal Index |_151.5 154.5 _ 1 = T53.605% 100 | qm gng 100 | z55q95* 100 | 75.605 * 100 % 100 98.6168 100.895 100.5696 9.9186 x 3.72 Moving Average Method (Ratio to moving average method): This method is widely used for measuring seasonal variations. The steps are as follows. Let the data be given for n periods (ie. quarterly, monthly etc.) (Calculate n-period moving average. These moving average values give estimate of the combined effects of trend and cyclic variations. Express the original data as a percentage of the centred moving average values. Using multiplicative model, these percentages would then represent the seasonal and irregular components. (ii) The preliminary seasonal indices are now obtained by eliminating the irregular or random components by averaging these percentages. For averaging either mean ot median is used. Gi) (iv) The sum of these indices = s (say) will not in general be 100n. Hence to get the sum 100n the adjustment is done by multiplying throughout by a constant factor = k= py Merits: (i) It is the most flexible and widely used method. Gi) These indices do not fluctuate as much as the indices by the ratio to trend method. Demerits: (i) This method does not completely utilize the data. Example 7: Determine seasonal indices for various quarters by using Ratio to moving average method. Year| 2011 2012 2013 Quarter 1 68 65 68 u 62 58 a mI 61 66 63 Iv 63 61 a:solution: irst we have to Firs! ne trend values by using 4 quarterly moving averages. ‘able 1: Calculations of ratio to moving averages Yearand / Original | 4quarterly | 2point | quarterly moving | Ratio to M.A. quarter values] moving totals | moving average Col(2) totals _ Coll) = 100% Co1(5) (oe = Col(8) 2) 8) @ @ © 2011-1 68 u 62 254 1 or 505 63.125 96.6336 : 251 _ oa 498 62.250 101.2048 247 2012-1 65 499 62.375 104.2084 i 252 0 58 502 62.725 92.43028 250 wm 66 503 62.875 104.9702 253 Vv 61 511 63.875 95.49902 258 2013-1 68 513, 64.125 106.0429 255 63 516 64.500 97.67442 261 m 63 Vv o7 Table 2: Calculations of seasonal Indices: Ratio to moving averages Seasonal | Seasonal Indices Year 2011 2012 2013 Indices adjusted = Average =Average at Geddes 399.3318 T = 104.2084 | 106.0429 |” 105.1257 105.30 u = 92.43028 | 9767442 | 95.05235 95.21 m 96.63366 | 104.9702 - 100.8019 100.97 Iv 101.2048 95.49902 - 98.35192 98.52 Total 399.3318" 400.00 F since the total is not 400 we have to calculate Seasonal Indices adjusted by multiplying by factor k= A = ctor k = 359 3939 = 1.00173.7.3 Ratio to Trend Method: In this method trend values are first determined by the method of jeast square by fitting a mathematical curve that is a straight line, parabola etc. It is based on the assumption that seasonal variation for any given period is a constant factor of the trend. The measurement of seasonal variation by this method consists of following steps. Let the data be given for n periods (ie. quarterly, monthly etc.). (i) Obtain the trend values by least square method by fitting a mathematical curve. (i) Express the original data as a percentage of trend values assuming multiplicative model. These percentages will contain seasonal, cyclical and irregular components. (iii) The cyclic and irregular components are wiped out by averaging the percentages fr different periods, leaving the seasonal indices. aot (iv) Finally these values are multiplied by the factor .[ Since the sum of these indices (say) will not in general be 100n. Hence to get ne aur 100n the adjustment is done by Lf multiplying throughout by a constant factor = k= 2 Merits: (i) The advantages of this method over the moving average method lies in the fact that ratio to trend can be obtained for each period. Demerits: (@ IE the series exhibits significant cyclical swing, the trend values obtained by uare can never follow the actual data as moving average method. the least squ