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:
- 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.
- 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.
- 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.