A financial domain is a segment of finance that can be cut off from all other market segments in order to analyze it directly. Many market segments are so heavily intertwined with others that separating them for analysis is impossible. With a financial domain, either the market segment is already separate from other segments or the other segments are easy to remove or ignore. This allows economists to look at that one specific area to determine overall activity. Since these segments can be studied so easily, they are often used as indicators of overall financial health.
When looking at an entire marketplace, it is difficult to separate one segment from another. For instance, securities all run together into such a conglomeration that it is difficult to separate stocks, bonds and commodities from one another. This makes it practically impossible to study the systems as a whole. The best anyone can do is look at a specific portion of the market or a slice of the whole market a specific time.
With other financial areas, it is possible to isolate a small area for study. In this case, the area can be examined over time to look for trends. These trends often have a correlation to the market as a whole; essentially, if one area is thriving, it is likely that the areas that cannot be examined are doing well also. The information gained through these studies may be used to create a market model that can predict the way that small portion will act given the right circumstances.
The most prevalent financial domain is the real estate industry. While real estate does have connections outside the actual buying and selling of houses, such as with the lumber industry, these connections are influenced by the real estate domain rather than real estate being influenced by them. If nobody wants trees for houses, then the mills may slowdown, but if a mill slows down first, a building company can just get wood from a different source.
Since real estate financial domain is so isolated from other markets, the way people act in this one area gives a good indication of the way they act in others. If a lot of people are building and buying new homes, it shows that people have a lot of surplus income and the economy is doing well. If the market is stagnant, people don’t have extra money and the economy may be in trouble.
The activity within a financial domain is often used as an early warning system. If people are afraid for the future, they will often stop spending even if the economy is doing well. On the other hand, even if the economy is doing poorly, they will spend money if they believe they will have more soon. By using these indicators, economists can predict changes in a financial segment days or months before it actually happens.