15 Holt’s method assumes an additive trend. For example, a trend of 5 means that the base will increase by 5 units per period. Suppose there is actually a multiplicative trend.

Thus, if the current estimate of the base is 50 and the current estimate of the trend is 1.2, we would predict demand to increase by 20% per period. So we would forecast the next period’s demand to be 50(1.2) and forecast the demand two periods in the future to be 50(1.2)2. If we want to use a multiplicative trend in Holt’s method, we should use the following equations:

Lt  a * (xt)  (1 

a) * (I )

Tt  b * (II )  (1 

b) * Tt1 a Determine what I and II should be.

b Suppose we are working with monthly data and month 12 is a December, month 13 a January, and so on.

Also suppose that L12  100 and T12  1.2. Suppose x13  200. At the end of month 13, what is the prediction for x15? Assume a  b  0.5.