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Barometric Method of Forecastin1

The barometric method of forecasting uses economic indicators to predict trends in overall business activity. It was originally developed in the 1920s but failed to predict the Great Depression. The National Bureau of Economic Research revived it in the 1930s using leading, coincidental, and lagging economic indicators classified by how they relate to business cycles. The method analyzes movements in indicators over time to forecast future trends, but it has limitations as leading indicators can be difficult to find and it only enables short-term forecasting.

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217 views2 pages

Barometric Method of Forecastin1

The barometric method of forecasting uses economic indicators to predict trends in overall business activity. It was originally developed in the 1920s but failed to predict the Great Depression. The National Bureau of Economic Research revived it in the 1930s using leading, coincidental, and lagging economic indicators classified by how they relate to business cycles. The method analyzes movements in indicators over time to forecast future trends, but it has limitations as leading indicators can be difficult to find and it only enables short-term forecasting.

Uploaded by

Aaruni
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 DOCX, PDF, TXT or read online on Scribd
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Barometric Method of Forecasting

Definition: The Barometric Method of Forecasting was developed to


forecast the trend in the overall economic activities. This method can
nevertheless be used in forecasting the demand prospects, not necessarily
the actual quantity expected to be demanded.

Often, the barometric method of forecasting is used by the meteorologists


in weather forecasting. The weather conditions are forecasted on the basis
of the movement of mercury in a barometer. Based on this logic,
economists use economic indicators as a barometer to forecast the overall
trend in the business activities.

The Barometric Method of forecasting was first developed in 1920’s, but,


however, was abandoned due to its failure to predict the Great Depression
in 1930’s. The Barometric technique was, however, revived, reformed and
developed further by the National Bureau of Economic Research
(NBER), USA in the late 1930’s.

The barometric method is based on the approach of developing an index of


relevant economic indicators and forecasting the future trends by analyzing
the movements in these indicators. A time-series of several indicators is
developed to study the future trend. These can be classified as:

1. Leading Series: The leading series is comprised of indicators which


move up or down ahead of some other series The most common examples
of leading indicators are- net business investment index, a new order for
durable goods, change in the value of inventories, corporate profits after
tax, etc.
2. Coincidental Series: The coincidental series include indicators
which move up and down simultaneously with the general level of
economic activities. The examples of coincidental series – the rate of
unemployment, the number of employees in the non-agricultural sector,
sales recorded by manufacturing, retail, and trading sectors, gross national
product at constant prices.
3. Lagging Series: A series consisting of those indicators, which after
some time-lag follows the change. Some of the lagging series are-
outstanding loan, labor cost per unit production, lending rate for short-term
loans, etc.
The following are the criteria on which the indicators are chosen:

 The economic significance of the indicator; such as greater the


significance the greater is the score of the indicator.
 Time Series- statistical adequacy; a higher score is given to the
indicator provided with adequate statistics.
 Conformity with the movement in overall economic activities.
 Immediate availability of the time series.
 The consistency of the series to the turning points in overall
economic activities.
 Smoothness of the series.
The problem of indicator selection may arise if some indicators appear in
more than one class of the indicators.

The only advantage of the barometric method of forecasting is that is helps


to overcome the problem of finding the value of an independent variable
under regression analysis. The major limitations of this method are; First,
Often the leading indicator of the variable to be forecasted is difficult to find
out or is not easily available. Secondly, the barometric technique can be
used only for a short-term forecasting.

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