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Method of Least Squares

The method of least squares provides the best-fitting straight line to a set of data points by minimizing the sum of the squared residuals, or deviations from the line. It works by determining values for the constants a and b in the trend line equation Y = a + bX that satisfy two conditions: 1) the sum of deviations of actual Y values from estimated Y values is zero, and 2) the sum of squared deviations is minimized. The constants a and b are estimated using a system of two normal equations solved using the data points. This results in a trend line that best represents the overall trend in the data.

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159 views7 pages

Method of Least Squares

The method of least squares provides the best-fitting straight line to a set of data points by minimizing the sum of the squared residuals, or deviations from the line. It works by determining values for the constants a and b in the trend line equation Y = a + bX that satisfy two conditions: 1) the sum of deviations of actual Y values from estimated Y values is zero, and 2) the sum of squared deviations is minimized. The constants a and b are estimated using a system of two normal equations solved using the data points. This results in a trend line that best represents the overall trend in the data.

Uploaded by

Roshni O V
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Method of Least Squares

• The line of best fit is a line from which the sum of the
deviations of various points is zero.
• This is the best method for obtaining the trend values. It gives
a convenient basis for calculating the line of best fit for the
time series.
• It is a mathematical method for measuring trend. Further the
sum of the squares of these deviations would be least when
compared with other fitting methods. So, this method is
known as the Method of Least Squares and satisfies the
following conditions:
(i) The sum of the deviations of the actual values
of Y and Ŷ (estimated value of Y) is Zero. that is Σ(Y–Ŷ) = 0.
(ii) The sum of squares of the deviations of the actual values
of Y and Ŷ (estimated value of Y) is least. that is Σ(Y–Ŷ)2 is least ;
Procedure:
(i)  The straight line trend is represented by the equation
Y = a + bX          …(1)
where  Y is the actual value, X is time, a, b are constants      
(ii)  The constants ‘a’ and ‘b’ are estimated by solving the following
two normal Equations   
ΣY = n a + b ΣX    ...(2)
ΣXY = a ΣX + b ΣX2       ...(3)
Where ‘n’ = number of years given in the data.  

(iii) By taking the mid-point of the time as the origin, we get ΣX = 0

(iv) When ΣX = 0 , the two normal equations reduces to


The constant ‘a’ gives the mean of Y and ‘b’ gives the rate of
change (slope).

(v) By substituting the values of ‘a’ and ‘b’ in the trend


equation (1), we get the Line of Best Fit.
Therefore, the required equation of the straight line trend is given by
Y = a+bX;
Y = 45.143 + 1.036 (x-2003)
The trend values can be obtained by

When X = 2000 , Yt = 45.143 + 1.036(2000–2003) = 42.035


When X = 2001, Yt = 45.143 + 1.036(2001–2003) = 43.071,

similarly other values can be obtained.


Example 2
Given below are the data relating to the sales of
a product in a district. Fit a straight line trend by
the method of least squares and tabulate the
trend values.
•Computation of trend values by the method of
least squares. In case of EVEN number of years,
let us consider

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