Base Year: The First Pencil Mark on the Wall

To know how much a child has grown since last month, you need a mark on the wall. Without one, you're just guessing whether the child looks taller or shorter. The economy works the same way.

Prices for goods and services change constantly from year to year. If the price of bread doubles, a bakery that makes the same 10 loaves as last year will still see its sales double. Output hasn't changed, but it looks like the economy doubled in size. That's an illusion.

To get rid of this illusion, statisticians pick one fixed starting point for comparison. That agreed-upon year is the base year. If you apply the base year's price tag to every other year's output, you can clearly see the change in real output, with the rise in prices taken out.

It's like putting an empty bowl on a kitchen scale and pressing the zero button. Once you set the starting point, you can see only what has changed.

In economic indicators like the Consumer Price Index (CPI), the base year is usually shown as 100. Setting the base year's prices to 100 makes the math very easy. If this year's price index is 105, you can tell in your head that prices are up 5 percent from the base year. If prices are lower than in the base year, the index drops below 100, to something like 95.

Thanks to this, economists can compare complicated statistics at a glance. If the base year kept changing at random, you'd have to run a long calculation every time just to understand what a number means. In statistics, the number 100 works as a baseline for measuring the size of a change.

To be more precise, a base year isn't a fixed year you choose once and use forever. Over time the world changes, and so do the things people like to buy.

For example, the items counted in price calculations used to be different from today's. Now many people spend money on smartphone plans and online video streaming services. If you stay tied to an old base year, you get a distortion that misses real changes in spending.

That's why Statistics Korea (now the National Data Agency) and the Bank of Korea update the base year to a recent year every five years. They usually choose a year ending in 0 or 5 as the new base year, and then refill the shopping basket with new items and new weights. One more thing: since 2009, when the Bank of Korea calculates real GDP, it doesn't use the prices of one fixed year. Instead it uses a chain-weighted method that links each year to the prices of the year before. The base year then serves as the point where that index is set to 100. Changing the base year regularly keeps economic statistics honest and true to real life.