This exercise is about using "sighting."
Sighting is a skill artist use to maintain proportion by comparing relative shapes or lines to each other. This exercise tells artist to hold their pencil at arms length and use their thumb to measure an object in the real world. Once they have that measurement, they can find the proportion of everything else relative to it.
I don't like to use this method when I draw. During a model session, when you hold up your arm, stick out your tongue and squint one eye as you meticulously measure the length of the model's arm to their thigh is embarrassing. I like the old fashioned way of just drawin'.