Discuss the difference between a cyclical component and a seasonal component. Which component is more predictable, seasonal or cyclical? Discuss and illustrate with examples.
Difference between a cyclical component and a seasonal component
Answer 1: A cyclical component means the pattern is repeated at irregular intervals and that the period when it reoccurs is over a year, and the outcome may change from one cycle to another.
A seasonal component is in which a certain pattern is repeated after a regular period of time, and the recurrence is usually less than a year.
After saying this, we can conclude that seasonal component is more predictable than the cyclical one. The cyclical component is not constant, but the seasonal is constant more or less.
Answer 2: It is important to understand the difference with the help of examples:
seasonal components: The average air fares generally increase during the festive months of a year. this is mainly due to fact that people travel more during the festive months. Either they go for a vacation or they visit their hometown if they are residing elsewhere.
Thus, the time series of the average air fares would show a peak during the festive months. As this pattern is repeated at a constant interval, this is a seasonal component and hence it is easier to predict when the air fare increase.
Cyclical component: Let us consider the time series of amount of the saving that an individual can make in a month, starting from the day he earns. Generally, we would observe an increasing trend in this time series till the day he marries. Once he has a family to support the savings rate would come down and stabilize after some time. Next, when he has child, the saving rate would again take a decreasing trend because now he has one more member to support. Now this time series would exhibit a cyclical trend because the recurrence period is not fixed. Different individual marry at different ages.
Si this component cannot be predicted easily.