Base-Year Analysis

DEFINITION of 'Base-Year Analysis'

1. The analysis of economic trends in relation to a specific base year. Base-year analysis expresses economic measures in base-year prices to eliminate the effects of inflation.

2. The analysis of a company's financial statements by comparing current data with that of a previous year, or base year. Base-year analysis allows for comparison between current performance and historical performance.

BREAKING DOWN 'Base-Year Analysis'

1. Base-year analysis is often used when expressing gross domestic product, and is known as real GDP when referred to in this way. By eliminating inflation, the trend of economic growth is more accurate, as price level changes are accounted for.

$$ (Base Year) = $$ (Chosen Year) x Price Index (Base Year) / Price Index (Chosen Year)

2. Base-year analysis of a company's financial statements is important to be able to determine whether a company is growing or shrinking. If, for example, a company is profitable every year, the fact that its revenues are shrinking year-over-year may go unnoticed. By comparing revenues and profits to those of a previous year, a more detailed picture emerges.

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