TIME-SERIES ANALYSIS AND 1

FORECASTING

Least Squares Method

Presented by :
 Agenda
2

 Introduction
 Meaning
 Concept
 Merits
 Demerits
 Case Study
 Time-Series
3

 Time series examines a series of data over time

 In studying the series, patterns become evident and
these patterns are used to assist with future decision
making
 Time series relies on the following;
 Identification of the underlying trend line
 Measurement of past patterns and the assumption
that these patterns will be repeated in the future
 Forecast of future trends of data
 Components
4

 The four main components of time series are;

 Secular trend
 Cyclical movement
 Seasonal movement
 Irregular movement
 Methods of measuring trend values
5

 Freehand Curve Method

 Semi-Average Method
 Least Squares Method
 Moving Average Method
 Least Square Method
6

 This method uses the given series of data to

develop a trend line for predictive purposes
 The least-squares method establishes a trend line
from;

∑y = na+b∑x
∑xy = a∑x+b∑x²
 Concept
7

Straight line trend is given by

Y = a+bx in order to determine the values of constant a
and b. The following two normal equations are to be
solved
∑y = na+b∑x
∑xy = a∑x+b∑x²
∑ Y= sum of actual values of y variable
∑x = representation sum of deviations
∑x² = representation sum square of deviations
∑xy = representation of the products sum of
deviations
 Cont’d
8

Y-axis
Y= a + bx

slop
e } Intercept
X-axis

 Y represents the estimated value of the trend .

 X represents the deviations in time period.
 a and b is constant.
 a represent intercept of line.
 b represent slope of line.
 Merits
9

 This is the only method of measuring trend which

provides the future values authentically very
convincing and reliable.
 This method is used for forecasting the series for
example
 This method has no scope for personal bias of the
investigator.
 It is only method which gives the rate of growth
per annum
 Demerits
10

 The method requires mathematical ability. Some time

it involves tedious and complicated calculations.
 The method has no flexibility i.e., if even a single

term is added to series it makes necessary to do all

the calculations again.
 Estimated and prediction by this method are based

only on long term variations and the impact of

cyclical, seasonal and irrigation variation are
completely ignored.
 Case Study
11

 From the information provided by Smith Company.

Fit a straight line trend by using Least Squares
Method.
 Further find the gap between calculated and actual
value and convert the equation into monthly basis
12
13

869=13a+78b
5629=78a+650b

a= 50.88
b= 2.280

Yc = 50.8846 + 2.28022*X
14
15
16

Yc = 50.8846 + 2.28022*X

 B. Convert the equation monthly basis:

Yc = 4.240383 + 0.190018*X
17

Thank You