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What Is A Base Year?
Base year refers to the reference duration utilized to gauge changes in statistical and economic data over time. It reflects the condition of an economy and the prices of products or services with accuracy. Moreover, it plays a vital role in constructing crucial economic indicators like the gross domestic product.
This base point in time allows individuals to draw comparisons across multiple periods. It can also help in measuring an organization’s growth. Entities or individuals can consider any year a base year. However, typically, analysts consider a recent year as a base year. The choice of year has a vital effect on the results obtained using statistical and economic analysis.
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- Base year refers to a specific year in which the calculation of a particular number series starts. It helps determine GDP and other important economic indicators.
- Unlike the current year, the base year is not subject to change every year. In other words, the former is dynamic while the latter is not.
- There are various benefits of using this concept. For example, it helps construct crucial indicators and can help analysts monitor growth in terms of performance and growth systematically.
- People often consider the base year value 100 to make calculations more straightforward.
Base Year In Economics Explained
Base year refers to the first of any sequence or series of years within a particular financial or economic index. As noted above, it offers a reference point for gauging alterations in statistical and economic data over any period. Without it, individuals may find it challenging to figure out if alterations concerning economic indicators were because of changes in data accumulation or measurement techniques or if actual alterations occur within the economy.
Besides the calculation of Gross Domestic Product (GDP), individuals may use this concept to compute same-store sales. The determination of such a year depends on the kind of analysis one is carrying out. For instance, any organization having an incorporation date in 2023 may utilize the same year to gauge growth in sales in the future. That said, one must remember that they set the base year value in economics at 100 to simplify calculations. Also, note that one may change or update this year with time to reflect the altering economic trends or conditions.
How To Use The Base Year To Calculate GDP?
Besides the calculation of GDP, individuals may use this concept to compute same-store sales. The determination of such a year depends on the kind of analysis one is carrying out. For instance, any organization having an incorporation date in 2023 may utilize the same year to gauge growth in sales in the future. That said, one must remember that they set the base year value in economics at 100 to simplify calculations. Also, note that one may change or update this year with time to reflect the altering economic trends or conditions.
One can utilize this concept to compute gross domestic product of an economy by following these steps:
- Determine which goods and services the economy produced during the fiscal year.
- Consider any of the recent years as base year, ensuring that no special event occurred that year.
- Multiply the price of each unit of every good or service in the base year and multiply the result by the quantity of the respective good or service produced within the geographical boundaries the same year.
- Add up the values of all goods and services produced that year to compute real GDP.
Examples
Let us look at a few examples to understand the concept better.
Example #1
Suppose we have the information presented in the table below:
| Product | 2015 | 2016 |
|---|---|---|
| Quantity of bananas | 100 | 300 |
| Price of bananas | $1 | $1 |
| Quantity of Oranges | 60 | 100 |
| Price of oranges | $2 | $3 |
In this case, let us consider the value base year value for GDP calculation is 100.
Therefore, the real GDP of 2015 will be $1 x 100 + $2 x 60, i.e., $220.
Similarly, the real GDP of 206 will be $1 x 300 + $ 3x 100, i.e., $600
Example #2
In the first week of April 2022, the Indian government announced that it did not plan to alter the base year for computing GDP to 2020-2021. The reason behind this announcement was that per Rao Inderjit Singh, the minister of state of the Ministry of Statistics and Programme Implementation or MoSPI, the pandemic had a significant effect on economic activities during 2020-2021. In addition, it impacted the data accumulation needed for base revision.
Note that 2020-2021, 2018-19, as well as 2019-2020, were out of consideration as sufficient data sets were unavailable for revision. Currently, the base point in time for the calculation is 2011-2012.
Importance
One can go through the following points to understand the importance of base year in economics.
- It helps individuals construct price indices, which help in gauging the price change of a collection of products and services over time. An example of such a price index is a consumer price index.
- It can assist one in constructing essential indicators.
- Analysts can systematically assess and track the growth and performance trajectories of companies, certain industries, and economies.
- Such a base point in time can accurately reflect the condition of a certain economy.
Difference Between Base Year And Current Year
For individuals new to the world of finance or economics, there is often confusion regarding the concepts of base and current year. Let us look at the differences between these two concepts:
| Base Year | Current Year |
|---|---|
| This year refers to a benchmark with regard to which determination of public record figures such as total national output or GDP, gross capital development, and gross homegrown saving. | The current year refers to the financial or accounting year that is ongoing. In other words, it is a specific year in finance that started but is yet to end. |
| It is not dynamic. In other words, it does not change every year. | The current year is dynamic and changes every year. |
Frequently Asked Questions (FAQs)
No, one may not select any year as the year. Typically, the selection depends on the study’s intent or the analysis that one wants to carry out. In addition, note that experts suggest that the year should not include any natural calamity and be among any of the recent years. If one selects a year without taking these things into account, the calculation may be inaccurate.
Changing this year leads to an alteration in the perspective regarding what changes have taken place. However, fundamentally, it does not change the outcome or results. The United States government changes this year periodically for different economic indicators that are crucial. Examples of such indicators include real GDP, producer price index, and consumer price index.
In this particular year, the price index’s value is 100, always by definition. Hence, both nominal and real GDP are identical at this base point in time.
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