Base effect (inflation)
Encyclopedia
The Base effect relates to inflation
in the corresponding period of the previous year. If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index
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.
An illustration of the base effect would be like: Price Index 100 goes to 150, and then to 200. The initial increase of 50, gives the percentage increase as 50% but the subsequent increase of 50 gives the percentage increase as 33.33%. This happens arithmetic
ally as the base on which the percentage is calculated has increased from 100 to 150.
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
in the corresponding period of the previous year. If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index
Price index
A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...
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.
An illustration of the base effect would be like: Price Index 100 goes to 150, and then to 200. The initial increase of 50, gives the percentage increase as 50% but the subsequent increase of 50 gives the percentage increase as 33.33%. This happens arithmetic
Arithmetic
Arithmetic or arithmetics is the oldest and most elementary branch of mathematics, used by almost everyone, for tasks ranging from simple day-to-day counting to advanced science and business calculations. It involves the study of quantity, especially as the result of combining numbers...
ally as the base on which the percentage is calculated has increased from 100 to 150.