The base year is the year in which an index is set to 100. A base year is the first series of years which is set at an arbitrary amount of 100. It is used for comparison by a price index. Base years are used to keep current data in a particular index. 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.
The base year is known as rebasing. Every 10 years there is a minimum of a 4% rise in the price of items, so the base year has to be changed. A base year is also used for the comparison of the business activity and economic index. It can be also described as the starting point from the point of growth.
Ideally, to monitor price, the officials will pick a Basket of Goods and set the value to 100 for a particular year. To measure the Inflation, the prices of these goods are taken, and the current index value is calculated and compared to the base value.
For better understanding, let's take an example here. Suppose the price of a basket is Rs. 10,000 in the base year. The index value was set to 100. Next year, the cost of the basket will be Rs. 12,000.
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. The index value was set to 120.
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