econs: criteria in selecting base year to calculate gdp?

Question

all econs freaks out there, can u answer this question plz? how did they know which year is the best to be the base so that their calculation will be more accurate?

plz provide with source if possible

Answer 1

The previous answer makes sense. However, there are other factors that are involved in choosing a specific year.

First off, you need to to consider a particular year in which the data of that particular year, was the accumulation of several years of stability in the major economic variables. That is to say, that if we were to choose 2005 or 2006 as a base year, it wouldn't be a good idea becuase of the high inflation rates and other variation in data due to the oil crisis.

Furthermore, it has to be a year that resembles the current composition of the country's economy. For example, if any given country's economy in 1990 didn't export much technology, but suddenly in the mid 90 it began to export tech, than the year needs to be adjusted. Otherwise there may be some misleading information there.

Finally, a base year needs to be seasonally adjusted in order to avoid irregularities that are normal throughout the course of the year. You can't just say that the gdp of X country is 100 and go from there. There's a large mathematical process involved in order to avoid statistical errors. Moreover, it is very expensive to change base years because of the research that goes into it.

If you want to get more info, pick up any MACROECONOMICS text book. You can just type it in on the google and you'll get info,

Answer 2

First of all, you don't need a base year to calculate GDP. You do need a base year to calculate the GDP deflator though. Which base year you choose is absolutely unimportant, because the important number is not the deflator itself, but its percentage change over time, which is going to be the same regardless of the base year you choose.

Also, GDP deflator, being a Paasche index, tends to understate inflation; CPI, being a Laspeyres index, tends to overstate it. This is why chain-type indexes were developed.

A good discussion of these issues can be found in Macroeconomics textbook by J. Bradford DeLong.

Answer 3

i am no economist, but any year can be a base year. the change is largely due to significat changes across time. for example, some countries use 1985 as a base year at PPP US$ to compare GDP across countries however, other countries who have made significant strides from 1985 in terms of development change their base year to say sometime in the middle.

it's all in the fine print, I think.

so long as you know what you are reading, you should be fine regardless of the base year. you need to check PPP though (purchase parity pricing) in order to compare, as well as inflation corrections, these will have to change too/

Answer 4

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Answer 5

I am an economist. The previous explanation is absolutely right.
Do not hesitate coming back to me if you need further explanations,
Regards,
Guillermo