Why is the stock exchange called a barometer of the economic and business conditions in a country?
Answers
Barometers are data points that indicate trends in the market. It is quite common for a stock index or exchange to be used as a barometer for the national economy.
The different types of barometer are
i)Economic barometer
ii) Market Barometer
iii) Consumer - Level Barometers.
The stock exchange is not only used as a platform to carry business transactions but as the barometers that help in indicating the general conditions of the business atmosphere. One can measure the economic and business requirements with the help of stock exchanges as they provide factual and accurate information about the companies.
The stock market has often been considered as the barometer, indicator or predictor of the economy.
Several economists believe that a substantial rise in stock prices show that the economy is on a path of growth and a significant fall in stock prices is indicative that the country is going to enter a period of recession.
Traditional valuation model of stock prices hold that stock prices suggest expectations about the future of the economy and thus predict the economy.
According to the ""wealth effect,"" stock prices directly affect what happens in the economy and thus lead to economic activity.