Page 322 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Unit 25 : Methods of Moving Averages
Hitesh Jhanji, Lovely Professional University

Unit 25 : Methods of Moving Averages Notes

CONTENTS
Objectives
Introduction
25.1 Methods of Moving Averages
25.2 Merits, Demerits and Limitations of Moving Average Method
25.3 Summary
25.4 Key-Words
25.5 Review Questions
25.6 Further Readings

Objectives

After reading this unit students will be able to :
• Discuss the Methods of Moving Averages.
• Know Merits, Demerits and Limitations of Moving Average Method.
Introduction

When a trend is to be determined by the method of moving averages, the average value for a number
of years (or month or weeks) is secured, and this average is taken as the normal or trend value for the
unit of time folling at the middle of the period covered in the calculation of the average.
This method may be considered as an artificially constructed time series in which each periodic
figure is replaced by the mean of the value of that period and those of a number of preceding and
succeeding periods. The computation of moving averages is simple and straight-forward. The
properties and the utility of discussed below.
25.1 Method of Moving Averages

Moving average method is quite simple and is used for smoothing the fluctuations in curves. The
trend values obtained by this method are very much accurate. Like semi-average method, this method
also employs arithmetic means of items. But here we find out the moving averages from the time
series. A moving average of a time series is a new series obtained by finding out successively the
average of a number of the original successive items choosen on the basis of periodicity of fluctuations,
dropping off one item and adding on the next at each stage.
The moving average may be for three, four, five, six, seven, .... years and so on according to the size
and the periodicity of fluctuations of the data. Suppose moving average is to be calculated for three
years. We will take the average of first three years and will place it against the middle year of the
three. Now leave the first item and add the next item of the series and take the average of these items
and place it against the middle year of the three. We will go on in this way, taking the average after
leaving one preceeding year, till the end. The formula for calculating moving averages is 3-yearly
moving average.
d
e
++ c
ab bc++ d c ++ e d ++ f
3 , 3 , 3 , 3 , ...

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