Base effect

Article summary

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 absolute difference of the same given percentage of a much larger or smaller reference value. E.g. 1% of a GDP of is not equal to 1% of GDP of in terms of absolute difference. The reference value is common called a base year in economics. A low base effect 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. Because of the base effect percentages in time series analysis can be misleading, in particular when percentages are compounded annually over a period of many years. A high base effect can mislead because of decreasing percentages even while the underlying absolute difference 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 absolute difference is decreasing over time as much as the measured value or population decreases over time. 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.…

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