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Base effect
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<p>The base effect is a mathematical effect that originates from the fact that a given percentage of a reference value, is not the same as the <a href="/facts/Absolute_difference/2AdTdj8a">absolute difference</a> of the same given percentage of a much larger or smaller reference value. E.g. 1% of a <a href="/facts/Gross_domestic_product/zQRgyFKc">GDP</a> of <a href="/facts/United_States_dollar/naEEDUhC">US$</a>1 million is not equal to 1% of GDP of US$1 billion in terms of <a href="/facts/Absolute_difference/2AdTdj8a">absolute difference</a>. </p><p>The reference value is common called a base year in economics. </p><p>A <a href="/facts/Low_base_effect/ln2KPr0z">low base effect</a> is the tendency of an absolute change from a low initial amount to be translated into a larger percentage change, while a high base effect would be the tendency of an absolute change from a high initial amount to be translated into a smaller percentage change. </p><p>Because of the base effect percentages in <a href="/facts/Time_series_analysis/fSXPR817">time series analysis</a> can be misleading, in particular when percentages are compounded annually over a period of many years. </p><p>A high base effect can mislead because of decreasing percentages even while the underlying <a href="/facts/Absolute_difference/2AdTdj8a">absolute difference</a> is increasing over time as much as the measured value or population increases over time. Also, a low base effect can mislead because of increasing percentages even while the <a href="/facts/Absolute_difference/2AdTdj8a">absolute difference</a> is decreasing over time as much as the measured value or population decreases over time. </p><p>A base effect is closely related to a base year, which serves as a reference point to normalize rates of change, similar to the function of a denominator in comparisons. </p><p>When inflation is measured with a <a href="/facts/Price_index/0okIszGK">price index</a> different formulas produce different results because of the base effect. E.g. <a href="/facts/Price_index/0okIszGK">Paasche versus Laspeyres price indices</a>. Because of the problems, in particular with <a href="/facts/Headline_inflation/4Yh1jqnS">headline inflation</a>, that arise from volatility in prices <a href="/facts/Core_inflation/X7XoQltU">core inflation</a> is used as an additional indicator of the development of inflation. </p><p>A lot of different methodologies can be used to correct for the base effect in computations of economic growth, and are often used in financial market analysis. </p><p>A base effect relates to <a href="/facts/Inflation/YvKtKrVI">inflation</a> when in the corresponding period of the <a href="/facts/Fiscal_year/qcR3PIXe">previous year</a>. If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the <a href="/facts/Price_index/0okIszGK">Price Index</a> will arithmetically give a high rate of inflation now. On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the price index now will show a lower inflation rate now. </p><p>An example of the base effect: </p> The Price Index is 100, 150, and 200 in each of three consecutive periods, called 1, 2, and 3, respectively. The increase of 50 from period 1 to period 2 gives a percentage increase of 50%, but the increase from period 2 to period 3, despite being the same as the previous increase in absolute terms, gives a percentage increase of only 33.33%. This is due to the relatively large difference in the bases on which the percentages are calculated (100 vs 150).