What is Base Period?

A base period is a point in time for which data is gathered and used as a benchmark against economic data from other periods. Base periods are often used in finance and economics applications, such as measuring inflation or other variables subject to change based on the passage of time. Base period is also referred to as "reference period."

Key Takeaways

  • Base period refers to the benchmark against which economic data from other periods is measured. This allows practitioners to spot changes in price levels which are not driven by fluctuations in inflation.
  • With the spread of data science and analytics processing, the use of base period has spread across multiple fields of study, such as natural sciences.

Understanding Base Period

The base period can be thought of as a yardstick for economic data. For example, if a price index has a base year of 1990, current prices are being compared to prices in that time period.

When used like this, the base period offers a method to measure changes in price by controlling for the inflation variable. Practitioners can then spot changes in price levels which are not driven by fluctuations in inflation.

As more financial methods use big data and data science applications, base periods for time series analysis grows as an ever more prominent feature of research methodologies.

The use of a base period is not constrained to financial applications. Many natural sciences also regularly use a base period as part of their analytical processes. For instance, to measure changes in global climate patterns, base years must be established.

Example of Base Period

The Kyoto Protocol, which was adopted in 1997, is a climate change agreement with base year that is the first year of tracking emissions for a pollutant. The EU-15, which is the ten countries in the organization prior to its enlargement in 2004, set itself a target of reducing emissions by 8%, for various pollutants, between 2008 and 2012. The countries set different base years for different pollutants.

For example, 1990 was set as base year for carbon dioxide, methane, and nitrous oxide. But 1995 was considered as base year for flourinated gases. As mentioned earlier, the goal in each case was to reduce emissions of the said gases by 8% from the base year.