Holt’s method assumes an additive trend. For example, a trend of 5 means that the level will increase by five units per period. Suppose there is actually a multiplicative trend. This means that if the current estimate of the level is 50, and the current estimate of the trend is 1.2, you would predict demand to increase by 20%

per period. So you 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 you want to use a multiplicative trend in Holt’s method, you should use the following equations:

Lt  Yt  (1)U Tt  V  (1)Tt1

a. What should U and V be to make this a sensible forecasting method?

b. Suppose you are working with monthly data and month 12 is December, month 13 is January, and so on. Also suppose that the level and trend, right after observing December’s value, are L12  100 and T12  1.2, respectively. Then you observe Y13