Page 167 - Data Science Algorithms in a Week

Time Series Analysis

Business profit - analysis of the trend

We are interested in predicting the profits of a business for the year 2018 given its profits for
the previous years:

Year Profit in USD
2011 40k

2012 43k
2013 45k
2014 50k

2015 54k
2016 57k

2017 59k
2018 ?
Analysis:

In this example, the profit is always increasing, so we can think of representing the profit as
a growing function dependent on the time variable represented by years. The differences in
profit between the subsequent years are: 3k, 2k, 5k, 4k, 3k, and 2k USD. These differences
do not seem to be affected by time, and the variation between them is relatively low.
Therefore, we may try to predict the profit for the coming years by performing a linear
regression. We express profit p in terms of the year y in the linear equation, also called a
trend line:

profit=a*year+b

We can find the constants a and b with linear regression.

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