Page 327 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes (ii) Ignores the Extreme Figures : This method ignores the extreme figures i.e. figures for first and
last few years. Then the trend value for all the years cannot be computed. Hence, perfectly
accurate trend line cannot be drawn.
(iii) Extreme Values : In this method, moving averages are calculated by using the arithmetic average.
Thus, like arithmetic average it is also affected by extreme values of the series.
(iv) Non-linear Trend : If the basic trend in the data is not linear this method will produce a bias in
the trend. According to Wough, “If the trend line is concave downward (like the side of a bowl), the
value of the moving average will always be too high; if the trend line is concave downward (like the side
of a derby pot), the value of the moving average will always be too low.”
(v) Forecasting : Since moving average is not represented by a mathematical function, this method
is of little use in forecasting. Thus, it does not fulfil the basic objective of trend analysis.
(vi) Conditions : There are certain conditions for the use of this method. But these conditions are
seldom met.
In short, despite of above cited demerits, it is becoming popular in the analysis of seasonal
variations.
Limitations of Moving Average
1. Trend values cannot be computed for all the years. The longer the period of moving average,
the greater the number of years for which trend values cannot be obtained. For example, in a
three-yearly moving average, trend value cannot be obtained for the first year and last year, in
a five-yearly moving average for the first two years and the last two years, and so on. It is often
these extreme years in which we are most interested.
2. Great care has to be exercised in selecting the period of moving average. No hard and fast rules
are available for the choice of the period and one has to use his own judgment.
3. Since the moving average is not represented by a mathematical function this method cannot be
used in forecasting which is one of the main objectives of trend analysis.
4. Although theoretically we say that if the period of moving average happens to coincide with
the period of cycle, the cyclical fluctuations are completely eliminated, but in practice. Since the
cycles are by no means perfectly periodic, the lengths of the various cycles in any given series
will usually vary considerably and, therefore, no moving average can completely remove the
cycle. The best results would be obtained by a moving average whose period is equal to the
average length of all the cycles in the given series. However, it is difficult to determine the
average length of the cycle until the cycles are isolated from the series.
5. Finally, when the trend situation is not linear (a straight line) the moving average lies either
above or below the true sweep of the data. Consequently, the moving average is appropriate
for trend computations only when :
(a) the purpose of investigation does not call for current analysis or forecasting.
(b) the trend is linear, and
(c) the cyclical variations are regular both in period and amplitudes.

Self-Assessment
Fill in the blanks–
1. The period of moving average is to be decided in the light of the ............ of the cycle.
2. Moving average method is used for smoothing the ............ in the curve.
3. The formula for calculating moving averages is ............ moving average.
4. Moving average method is ............ as compared to the method of least squares.
5. Moving averages are calculated by using the ............ average.

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