Base year is the initial period taken as a reference, mostly in index constructions, a year to which a value of one hundred is consistently assigned.
This base year is the initial situation from which one starts in the elaboration of index numbers, while the situation being compared is called the current period or current period. Thus, the elaboration of indexes with a base year allows making comparisons of a current situation with reference to a past period.
Now, an index is a statistical measure that highlights the changes in one or more variables related to time. In economics, the construction or elaboration of indices is very common. Thus, for example, in economics the following are constructed:
- Price indices.
- Inflation index.
- Labor force index
So the base year is extremely useful in economics. It allows to elaborate time series. That is, in economics they become a fundamental instrument to summarize statistical information on one or more economic variables. This economic variable can be, for example:
- Rate of inflation.
- Economic growth.
Requirement in the choice of the base year
For the correct choice of a base year, certain conditions must be met, the main conditions are the following:
- That the chosen year is a period of relative and economic stability. So that no activities or economic phenomena of relevant magnitudes have been recorded in this. For example, inflationary processes, political disturbances, periods of economic recession, etc.
- That the chosen period is not very distant, since this must be a representative period of the type of economy of the current or current period.
- It is also necessary to take into consideration the existence of good statistical information and information in general terms.
If, on the contrary, these aspects are not taken into account, the results as a referential means will be flawed.
Practical example using base year
Next, we are going to present a small example using the base year. This series will have index numbers referenced to a specific year, that is, to a base year. To achieve this, we are going to assume that the price of a liter of milk in 2016 was 0.68 euros in 2017, 0.72 in 2018, 0.75 euros, and 0.79 euros in 2019.
The formula used is: Year that elapses between the base year, multiplying this result by one hundred. Symbolically we have: At / ab x 100.
|2016||0.72 / 0.72 x 100||100|
|2017||0.75 / 0.72 x 100||104,16%|
|2018||0.79 / 0.72 x 100||109.72%|
We will take 2016 as the base year. Assuming that this year has been a year of economic stability, that is to say, that in this year there has been no type of disturbance in the economy. So we can compare the prices of 2017 and 2018 with the price of 2016.