Base Year
What is Base Year?
Base years are the reference periods an index is set equal to 100, so every other reading in the series is a percentage of that period's level.
An index number means nothing until you know which period was chosen as the base and assigned the value 100. Every other value is that period's level as a percentage of the base, so 112 sits 12 percent above the base and 94 sits 6 percent below it. The choice of base never changes a growth rate calculated between two periods, because the base cancels out of the ratio, but it does change every reported level, which is why comparing two index series with different bases is meaningless. Statistical agencies rebase periodically to keep the reference period recent and the weights relevant, and rebasing rewrites the entire history of levels while leaving percentage changes intact. For real GDP, the base year does double duty: it is also the year whose prices are used to value output.
Base Year: a worked example
Suppose a price index uses Year 1 as its base, so Year 1 = 100, and the index reads 110 in Year 3, meaning prices are 10 percent above the base. If the agency rebases to Year 3, every value is divided by 110 and multiplied by 100, so Year 3 becomes 100 and Year 1 becomes (100 ÷ 110) × 100 = 90.9. Every level changed, yet inflation between Year 1 and Year 3 is still (110 - 100) ÷ 100 = 10 percent, and on the new base (100 - 90.9) ÷ 90.9 = 10 percent as well. That invariance is why the base year is a bookkeeping choice rather than an economic one.
The mistake students make with base year
Students compare index values from two series with different base years and conclude one country has higher prices. An index level only describes distance from its own base, so a series at 130 with an old base can easily reflect lower inflation than one at 105 with a recent base. Check the base before comparing levels, and compare percentage changes instead, since those do not depend on the base at all.
Base Year questions
What does it mean when the base year equals 100?
Setting the base year to 100 makes every other value a direct percentage comparison with that year, so 118 means 18 percent above the base and 92 means 8 percent below it. The 100 is a convention, not a measurement. Any period can serve as the base without changing the underlying data.
Does changing the base year change the inflation rate?
No, the inflation rate between two periods is unaffected by rebasing, because the base cancels out when you take the ratio of two index values. What changes is the reported level of every number in the series. That is why growth rates, not levels, are the safe way to compare indexes.
Why does real GDP need a base year?
Real GDP values each year's output at the prices of one chosen year, so changes in the total reflect quantities produced rather than price movements, and that chosen year is the base year. Without it, there would be no fixed set of prices to hold constant. Chained measures update the reference prices continuously so the comparison does not distort as the base recedes.
Formula / Example
Related terms
Common comparisons
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