LINK RELATIVES’ METHOD

Short but Comprehensive introduction to Link Relatives Method in Measuring Seasonal Variation for Business Maths.

DEFINITION

A method for computing indexes by dividing the value of a magnitude in one period by the value in the previous period. In relative link method of seasonal variations, link relatives are calculated for all the values of the data.

PROCEDURE

Link relatives = value of a year/ value of previous quarter or month * 100

Then we calculate the sum of link relatives for each quarter or month. Average of these totals is calculated by dividing the totals by the total number of years in a quarter or month. Chain indices are calculated from these averages. Chain indices = average link relative of the year * chain index of previous year / 100. For first month or quarter, two chain indices are calculated. Adjustment factor is calculated by taking difference of two chain indices of first month or quarter and dividing it by number of months or number of quarters. The seasonal indices are calculated by subtracting adjustment factor from second quarter or month, twice of adjustment factor from third quarter or month and so on. The seasonal index for first quarter or month remains hundred.

STEPS

• Compute the link relatives by expressing each monthly or quarterly value as a percentage of the proceeding monthly or quarterly value
• Arrange the link relatives by months or quarter and find an appropriate average of these relatives for each month or quarter usually median is used
• Convert the average (median or mean) relatives into a series of chain relatives by setting the value of January or the first quarter as 100, and caring the process to include the first unit of the next period.
• A discrepancy due to trend increment (positive or negative) exists between the chain relative for the first January or quarter and that for the next prod. Adjust the chain relatives for the trend component by subtracting one-twelfth of the discrepancy from the value of February, two-twelfth from the value of march and so on or by subtracting one-fourth of the discrepancy from the relative of seco9nd quarter, two-fourth from the third quarter relative and three-fourth from fourth quarter relative.
• To obtain seasonal indices reduce the, adjusted chain relative to the same level as January or the first quarter by multiplying each of the adjusted chain relatives by the correction factor that will make the average of the all indices equal100. These final figures are the desired indices of seasonal variation.