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Trends Projection Method

Labels: Managerial Economics Trend projection method is a classical method of business forecasting. This method is essentially concerned with the study of movement of variable through time. The use of this method requires a long and reliable time series data. The trend projection method is used under the assumption that the factors responsible for the past trends in variables to be projected (e.g. sales and demand) will continue to play their part in future in the same manner and to the same extend as they did in the past in determining the magnitude and direction of the variable.

There are three (3) techniques of trend projection based on time series data.

1. Graphical Method: - under this method, annual sales data is plotted on a graph paper and a line is drawn through the plotted points. Then a free hand line is so drawn that the total distance between the line and the point is minimum. Although this method is very simple and least expensive, the projections made through this method are not very reliable. The reason is that the extension of the trend line involves subjectivity and personal bias of the analysis.

Sale

Years /Trend Projection

2. Fitting Trend Equation: Least square method: - Fitting trend equation is a formal technique of projecting the trend in demand. Under this method, a trend line (or curve) is fitted to the time series data with the aid of statistical techniques. The form of the trend equation that can be fitted to the time series data is determined either by plotting the sales data or by trying different forms of trend equations for the best fit. o When plotted, a time series date may show various trends. The most common types of trend equation are 1) liner and 2) exponential trends

Linear Trend: - When a time series data reveals a rising trend in sales than a straight-line trend equation of the following form is fitted. (S = A + BT ; Where S = annual sales , T = Time (in year) , A & B are constant. The parameter b given the measure of annual increase in sales)

Exponential trend:- When sales ( or any dependent variable) have increased over the past years at an increasing rate or at a constant percentage rate, than the appropriate trend equation to be used is an exponential trend equation of any of the following type ( Y = aebt , Or its semi logarithmic form -> Log y = = log a + bt; This form of trend equation is used when growth rate is constant.)

3. Double log trend equation of equation

Y = aTB Or its double logarithmic form Log y = log a + b log t This form of trend equation is used when growth rate is increasing.