- The base effect is the effect seen in the results after choosing a different reference point for a comparison between two data points.
- Using a different reference or base for comparison can lead to a large variation in ratio or percentage comparisons between data points.
- Because the base number makes up the denominator in the comparison, comparisons using different base values can yield widely varying results.
- If the base has an abnormally high or low value it can greatly distort the ratio, resulting in a potentially deceptive comparison.
- For example, the base effect can lead to an apparent under- or overstatement of figures such as inflation rates or economic growth rates if the point chosen for comparison has an unusually high or low value relative to the current period or the overall data.
For example –
Case 1 – The price index of january 2016 is 110 and that of January 2017 is 120.
Now Inflation of jan 2017 = (120-110)/110 *100 which comes out to be 9.09%.
Case 2 – The price index for March 2017 is 180 and that of March 2018 is 190. Now Inflation of March 2018 = (190-180)/180*100 which comes out to be 5.55%.
Now we see in both the case the increase in price index is 10 but the rate of inflation is different. This is due to the base effect.
