Page 326 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Unit 25 : Methods of Moving Averages

first four years and will be placed in between second and third years, i.e., in the middle of four Notes
years. Leaving the first year, calculate the total of next four years and so on. It is important to
note that these calculated totals are placed between two years. Then we adjust these moving
totals. For this we compute two yearly moving totals of four yearly moving totals. We take the
total of first and second four years moving totals and write against the third year and then the
second and third four yearly moving totals are totalled and written against the fourth year and
so on. The two yearly moving totals of four yearly moving totals are then divided by eight and
this gives us the centered four yearly moving average. The series so obtained is known as an
estimate of the trend.

Moving Averages method is that it is difficult to determine the proper period of
moving average. If a wrong period is selected, there is every likelihood that
conclusions may be misleading.

Characteristics of Moving Averages
The main characteristics of moving averages are as under :
(i) If the original data, when plotted on a graph, give a straight line, the moving averages will
simply reproduce the original line.
(ii) If the original series gives a curve which is concave, the moving average curve will be below it.
(iii) If the original series gives a convex curve, the moving average curve will be above it.
(iv) In a series having regular fluctuations, the moving average completely eliminates them, if the
period selected for it coincides with the period when the fluctuations repeat themselves.
(v) No particular period of a moving average will eliminate the fluctuations completely. But greater
the period, the greater will be the reduction in the irregular fluctuations. Because the duration
of business cycles always remain changing.
25.2 Merits, Demerits and Limitations of Moving Average Method

Merits of Moving Average Method
(i) Simple and Easy : This method is quite simple and easy to calculate as compared with all the
mathematical methods of fitting a trend.
(ii) Flexible : This method is highly flexible in the sense that if a few more figures are added to the
series, entire calculations are not changed. Only thing, we have to do is to extend the process so
as to calculate further trend values.
(iii) High Degree of Accuracy : This method is associated with a high degree of accuracy and it can
be made the basis for further analysis of time series.
(iv) Automatic Elimination of Fluctuations : If and when the period of moving average is equivalent
to the period of the fluctuations, the cyclical fluctuations are completely eliminated.
(v) Irregular Trend : This method is considered to be the most effective method if the trend of a
series is very irregular.
(vi) Practical Method : This method is most commonly used and in a very long series, it is the only
practical method.

Demerits of Moving Average Method
(i) Period of Moving Average : The main limitation or demerit of this method is that it is difficult
to determine the proper period of moving average. If a wrong period is selected, there is every
likelihood that conclusions may be misleading.

LOVELY PROFESSIONAL UNIVERSITY 321