What is a base year in economic indices?

What is a base year in economic indices?

• A. The year with the highest inflation.
• B. The reference year used for price indexes.
• C. The year when all prices are zero.
• D. The year with the lowest production.

Answer: (B)

Base year is the reference point used to construct price indexes, setting a standard to compare how prices change over time. When you create a price index, you compare every year’s prices to those in the base year, often scaling so the index value in the base year is 100 (or 1). This creates a stable benchmark that makes it easy to see how much prices have risen or fallen since that year. The base year is selected for consistency and convenience, not because it has the highest inflation or the lowest production. It does not imply zero prices; prices in the base year are the actual observed prices. In short, the base year is the reference year used for price indexes.