3336-C13.

qxd

12/23/04

12:17 PM

Page 593

Summary of Formulas

(1) determine a seasonal index for each month or quarter

(monthly or quarterly data); (2) deseasonalize the data by
dividing each observation by its corresponding seasonal
index; (3) determine the trend components by deriving a
least squares line or quadratic curve through the deseasonalized values; and (4) determine the cyclical components by,
for each time period, dividing each deseasonalized value by
its estimate using the trend equation and smoothing these
values by computing three-period moving averages.
Forecasting methods can be divided into two broad
categories: qualitative procedures and quantitative techniques. When arriving at a qualitative forecast, expert
opinion is used to arrive at a best-educated estimate of
future behavior. One such method is the Delphi method,
which requires input from a team of experts. Each team
member is then informed as to the responses from all
other members and asked to reevaluate his or her opinion
in light of this information. This process is continued for
several rounds until each member of the team feels confident in his or her final decision.
Quantitative forecasting, the main emphasis of this
chapter, dealt with two (sometimes overlapping) sets of
procedures: time series techniques and multiple linear
regression on time series data. Time series procedures
attempt to capture the past behavior of the time series and

use this information to predict future values. No external

predictors are considered; only the past observations are
used to describe and predict the future value of the time
series variable. Time series methods include, (1) projecting the least squares trend line, which extracts and
extends the trend and seasonal components, and (2) simple exponential smoothing, which reduces randomness
and forecasts future values by using the smoothed values.
Simple exponential smoothing works best when the
time series contains neither trend nor seasonality.
An index time series, often used by business analysts,
is a time-related sequence of index numbers in which each
value is a measure of the change in a particular item (or
group of items) from one year to the next. Price indexes
are used to compare prices over time.
An aggregate price index is used to compare the relative price of a set of items for any year to the price during
the base year. The index for the base year always is 100. The
prices for the items can be averaged (simple aggregate
price index) or weighted by the corresponding quantity of
each item (weighted aggregate price index). Methods of
selecting these quantities include using base-year quantities
(the Laspeyres index) or using the reference-year quantities
(the Paasche index). The most popular Laspeyres index in
practice is the Consumer Price Index (CPI).

Further Reading
Bowerman, B. L., and R. T. OConnell. Forecasting and Time Series: An Applied Approach,
3rd ed. Pacific Grove, Calif.: Brooks/Cole, 2000.
Brockwell, P. J., and R. A. Davis. Introduction to Time Series and Forecasting, 2nd ed. New
York: Springer-Verlag, 2002.
Hanke, J., A. Reitsch, and D. W. Wichern. Business Forecasting, 7th ed. Upper Saddle River,
NJ: Prentice Hall, 2001.
Kvanli, A., R. Pavur, and K. Keeling. Introduction to Business Statistics: A Microsoft Excel
Integrated Approach, 6th ed. Mason, OH: South-Western, 2003.
Makridakis, S., S. C. Wheelwright, and R. J. Hyndman. Forecasting: Methods and
Applications, 3rd ed. New York: Wiley, 1997.
Yaffee, R. A., and M. McGee. An Introduction to Time Series Analysis and Forecasting: With
Applications of SAS and SPSS. Burlington, Mass.: Academic Press, 2000.

Summary

of Formulas
where A = yt and B = tyt

Linear Trend Line

Deseasonalized Value of yt

y t = b0 + b1t
where

dt =
t = 1, 2, . . . , T
b1 =

tyt ( t)( yt )/T

t 2 ( t)2/T

b0 = yt b1 t =

12B 6(T + 1) A
T (T 2 1)

A
T + 1
b1
2
T

yt
corresponding seasonal index

Simple Aggregate Price Index

P1
P 100
0

593

3336-C13.qxd

12/23/04

Chapter 13

12:17 PM

Page 594

Time Series Analysis and Forecasting

Weighted Aggregate Price Index

P1Q
P Q 100
0

Forecasting Models
1. Using seasonality and trend:
y t+1 = [b0 + b1(t + 1)]

(seasonal index for period t + 1)

Laspeyres Index
P1Q0
P Q 100
0 0

2. Simple exponential smoothing:

y t+1 = St

where Q0 represents a base-year quantity.

where

Paasche Index

St = Ayt + (1 A)St1
0 < A < 1.

P1Q1
P Q 100
0 1
where Q1 represents a reference-year quantity.

X Review Exercises 13.7313.88

13.73 Each of the following influences on the variation in profits of a national chain of
department stores would contribute to which of the four components of a time series?
a. The long-term growth of the economy
b. The resignation of top managers in the company
c. Annual demand in spring and summer for garden equipment
d. The closing of several other department stores
13.74 A manufacturer of tractors has built a record number of tractors for every year for
the past seven years. Given in thousands, the figures show the number of tractors built
from 1998 to 2004.
Year
1998
1999
2000
2001
2002
2003
2004

Tractors Built
10.75
11.78
12.59
13.4
14.3
15.7
16.8

Find the least squares prediction equation that you would use to forecast the trend. What
would you estimate the number of tractors built in 2004 to be?
13.75 Luz Chemicals, which manufactures a special-purpose baking soda, is interested in estimating the equation of the trend line for their monthly sales data (in tons) for the year 2004.
Month
Jan.
Feb.
Mar.
Apr.
May
June

594

Baking Soda Sales

28
33
39
33
38
31

Month
July
Aug.
Sept.
Oct.
Nov.
Dec.

Baking Soda Sales

34
34
35
36
31
37