Module 5: Demand Forecasting

Session 10: Further Forecasting Techniques

Barometric Method:

1. Explain Barometric method of Demand Forecasting and atleast one of its advantage
and disadvantage?

Solution:

In barometric method, demand is predicted on the basis of past events or key variables which
are occurring in the present. This method is also used to predict various economic indicators,
such as saving, investment, and income. 

This technique helps in determining the general trend of business activities. For example,
suppose government allots land to the ABC society for constructing buildings. This indicates
that there would be high demand for cement, bricks, and steel.

 This consists in discovering a set of series of some variables which exhibit a close
association in their movement over a period or time.
 For example, it shows the movement of agricultural income (AY series) and the sale of
tractors (ST series). The movement of AY is similar to that of ST, but the movement in ST
takes place after a year’s time lag compared to the movement in AY. Thus if one knows the
direction of the movement in agriculture income (AY), one can predict the direction of
movement of tractors’ sale (ST) for the next year. Thus agricultural income (AY) may be
used as a barometer (a leading indicator) to help the short-term forecast for the sale of
tractors.

 Generally, this barometric method has been used in some of the developed countries for
predicting business cycles situation. For this purpose, some countries construct what are
known as ‘diffusion indices’ by combining the movement of a number of leading series in
the economy so that turning points in business activity could be discovered well in advance.
Some of the limitations of this method may be noted however. The leading indicator method
does not tell you anything about the magnitude of the change that can be expected in the
lagging series, but only the direction of change. Also, the lead period itself may change
overtime. Through our estimation we may find out the best-fitted lag period on the past data,
but the same may not be true for the future. Finally, it may not be always possible to find out
the leading, lagging or coincident indicators of the variable for which a demand forecast is
being attempted.