What Is a Base Year? How It’s Used in Analysis and Example Definition

The base year chosen measures the structure of the economy in that year and future estimates of GDP are based on measuring changes in absolute price levels. However, since the structure of production and of relative prices over time are dynamic, the structure of the prices of products and the industries surveyed in the base year become less relevant over time. For some rapidly changing products (such as the smartphone in recent years) rapid technological change and relative price falls make any kind of comparison fraught with difficulty. This problem is greater with emerging markets since rapid growth in GDP and exposure to international trade patterns means that the balance of agriculture, for example, to manufacturing and services is changing rapidly.

Base Period: What it Means, How it Works, Example

For example, let’s say you want to analyze the inflation rate in a country. To do this, you would select a base year and compare the prices of goods and services in subsequent years to the prices in the base year. When calculating a business operation or economic index, a https://www.adprun.net/ base year is used for comparison. For instance, finding the inflation rate between 2013 and 2018 is the base year or the first year in the set time. Also, the base year can define the starting point from a growth point or a benchmark for calculating the same-store sales.

1. To give an example, with a base year of 1996, Sudan’s base year is 25 years out of date which means that official GDP should be adjusted upwards by 60% (2.4% x 25 years) to reflect what it might be after rebasing.
2. Base years are used in economic and financial indexes as well as to measure the growth of a company.
3. Note also that the dollar signs cancel out so that index numbers have no units.
4. The base period can be thought of as a common yardstick for economic data.
5. This means GDP data uses a year-by-year chain linking method for compensating for monetary inflation and deflation.
6. Base period may also be referred to as “reference period”, “basis period”, or “index period.”

How Is a Base Year Chosen?

For example, to find the rate of inflation between 2016 and 2021, 2016 is the base year or the first year in the time set. The base year can also describe the starting point from a point of growth or a baseline for calculating same-store sales. Many financial ratios are based on growth because analysts want to know how much a particular number changes from one period to the next. A base year is a specific period used as a benchmark for comparison in various economic and financial analyses.

How is a Base Year Used in Analysis?

Furthermore, external investors into an economy can make more optimal decisions on capital flows whether by portfolio investment or FDI. Higher GDP at current market proces estimates inevitably change all economic variables how to enhance the audit to prevent and detect fraud that are expressed in terms of GDP. In the case of Nigeria, this beneficially affected measurements of its debt service burden reducing the public sector fiscal deficit and the public debt level as a percentage of GDP.

Why do we change the base year?

A base year is also used for the comparison of the business activity and economic index. In countries that revise base dates after some interval, very large increases in GDP are usually recorded as was the case with Nigeria, highlighting just how inaccurate data is that has been produced using out of date base years. The new and up-to-date base years are regularly added to keep data current to a database. A growth rate can be calculated by dividing the difference between the ending and starting values for the period being analyzed and dividing that by the starting value. The base year represents the starting point from which to determine growth. The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.Suppose the price of a basket is Rs. 12,000 in the base year.

What is the Reference Base Period?

Inflation is the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling. To calculate inflation, a base year is chosen, and the prices of a basket of goods and services are recorded for that year. These prices are then compared to the prices of the same basket of goods and services in subsequent years. The reference base period for the Consumer Price Index for All Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is currently set between 1982 and 1984. Therefore, if CPI rose from the reference base period, when it was valued at 100, to 118.3 by 1988, consumer prices would have risen by 18.3% over that time frame.

Data on a country’s GDP are used continually to monitor domestic growth rates in current terms and in constant prices and to make intercountry comparisons of growth or of GDP per capita levels. This paper provides a method to make adjustments to estimated GDP for countries when base years are updated irregularly to aid intercountry and historic comparisons. The most frequent use of a base year in economic data is in compiling price indices such as the GDP deflator to convert a current value such as GDP at market prices into GDP at constant prices. The constant price series are always published with reference to some base year such as 2010 in order that real growth in the volume of goods and services produced since that year can be measured.

Any year can be considered as the base year, but analysts choose recent years. While computing macroeconomic numbers such as Economic Growth rates, Inflation indices are used. Alternatively, though less commonly, the base period may refer to comparing each data point to a past data value using a constant interval of time rather than a constant base period. This technique does not create a consistent index comparison over time, but can help eliminate the effect of seasonal or short-term fluctuations in data. Year-over-year, or month-over-month comparisons are examples of using past data at a constant interval as a basis for comparison to current data. The base period can be thought of as a common yardstick for economic data.

For example, changes in accounting methods, the tax code, political party control, demographics, and social and cultural shifts. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. For example, a company established in 2021 could use that year to measure sales growth moving forward.

The reference base period provides an easy way for analysts to convey how much inflation has occurred from one year to the next. For example, if the current year has a CPI of 115, this would mean that prices today have increased by 15% from the base year, when CPI was 100. The reference base period is the year in which the Consumer Price Index, measuring changes in consumer prices in the U.S., is equal to 100.

Base years are used in economic and financial indexes as well as to measure the growth of a company. When researching stocks, investors can conduct a base-year analysis to track a company’s growth, or lack of, as part of research to determine whether or not they should invest in it. In the calculation of comp store sales, the base year represents the starting point for the number of stores and the amount of sales those stores generated. The store sold an average of $1,000 if Company A has 100 stores that sold a total of $100,000 last year. Following this method, the base year determines the base sales and the base number of stores. Every 10 years there is a minimum of a 4% rise in the price of items, so the base year has to be changed.

In finance and economics, base-year analysis includes all of the layers of analysis concerning economic trends in relation to a specific base year. For example, a base-year analysis could express economic variables relative to base-year prices to eliminate the effects of inflation. In accounting, base year may refer to the year in which a U.S. business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the dollar-value LIFO technique a company’s current inventory is restated to base-year prices in order to determine whether the quantity of inventory has increased or decreased.

Given the importance of accurate and relevant GDP estimates given the discussion above, World Economics has produced a simple methodology that can be used to update official GDP estimates when a base year is out of date. The method is based on an analysis of a database of examples of the impact of 28 tracked cases of rebasing on measured GDP over recent decades by country and the number of years the base year was out of date. The data is illustrated in Table 1 to 3 below which tracks cases of rebasing split by continent in Africa, Asia and the Americas. The tables list the previous base year, the rebased year, the number of years between rebasing, the measured percentage GDP uplift and the average uplift per year. For instance, if the GDP in the base year is $1 trillion and the GDP in the current year is $1.2 trillion, the GDP growth rate would be 20%. By using a base year, analysts can assess the performance of an economy and identify trends in economic growth.