Demand Estimation: The Barometric Method

Many economists use economic indicators as barometer to forecast trends in business activities.

The basic approach of barometer technique is to construct an index of relevant economic indicators and to forecast future trends on the basis of movements in the index of economic indicators. The indicators used in this method are classified as

  1. Leading indicators: – consists of indicators which move up and down ahead of some other series e.g. new order of durable goods, new building permits etc.

  2. Coincidental indicators: – are the ones that move up and down simultaneously with the level of economic activity. E.g. number of employees in the non-agricultural sector, rate of unemployment, sales recorded by the manufacturing, trading and the retail sectors etc.

  3. Lagging indicators consists of those indicators, which follow a change after some time lag. E.g. lending rate for short-term loans etc.

Development and allotment of land by Delhi Development Authority to Group Housing Societies (a lead indicator) indicates higher demand prospects for cement, steel and other construction material (coincidental indicators) and increase in housing loan distribution (lagging indicators).