A base year refers to the base point in time of a time series such as with a GDP deflator to convert GDP at current market prices into GDP at constant prices.
The reliability of GDP data is distorted by the failure of countries to regularly update their base years.
When GDP is revised and the base year is updated, it allows the statistician to reweight the relative importance of the different sectors of economic activity, and further change or reconsider the methods and data sources.
This paper provides a method to make adjustments to estimated GDP for countries when base years are updated irregularly to aid intercountry and historic comparisons.
The reliability of GDP data is distorted by the failure of countries to regularly update their base years. For example, Nigeria’s statistician-general announced in 2014 that the country’s GDP for 2013 had been revised upwards from 42.4 trillion naira to 80.2 trillion naira ($509 billion), a rise of 89%. The reason for the significant uplift was a rebasing of the economy from 1990, the previous base year, to 2010.
The failure to update base years is a serious problem which affects the perceived quality of GDP data. Data on a country’s GDP are used continually to monitor domestic growth rates in current terms and in constant prices and to make intercountry comparisons of growth or of GDP per capita levels. GDP time series prepared and published by National Statistics Offices are generally subject to frequent statistical revisions made using improved data or changes in accounting methodology, which means that care must be exercised in comparing time series of different vintages. Updating base years after a long interval is far more serious since it leads to step changes and major discontinuities in time series data reducing the accuracy of measured domestic growth rates and intercountry comparisons of growth and living standards. This paper provides a method to make adjustments to estimated GDP for countries when base years are updated irregularly to aid intercountry and historic comparisons.
A base year refers to the base point in time of a time series. The most frequent use of a base year in economic data is in compiling price indices such as the GDP deflator to convert a current value such as GDP at market prices into GDP at constant prices. The constant price series are always published with reference to some base year such as 2010 in order that real growth in the volume of goods and services produced since that year can be measured. The relevant index is constructed to measure how much prices have changed since the base year where the mean of the index point figures of a base year is taken as 100. Therefore, constant price estimates of GDP use the inflation adjusted price of goods and services relative to a base, to weight the volume components of output.
The base year chosen reflects a snapshot of the structure of the economy and the value of output in the different sectors – extraction, agriculture, manufacturing and services – and sub-categories within these sectors – as estimated by the output method of calculating GDP at one point in time.
The base year chosen must be a representative year and must not experience any abnormal incidents such as droughts, floods, earthquakes, a major economic downturn etc. It also must be a year which is reasonably proximate to the year for which the national accounts statistics are being calculated. Countries all over the world follow different ways of fixing the base year. In India, for example, the first estimates of GDP were made in 1956 taking 1948-49 as the base year. With the gradual improvement in availability of data, the methodology was revised. Earlier, the Central Statistical Office depended on the population figures in the National Census to estimate the workforce in the economy. Therefore, the base year always coincided with the census figures like 1970-71, 1980-81 etc. Subsequently the CSO decided that the National Sample Survey (NSS) figures on the workforce size were more accurate and hence, the base year would change every five years when the NSS conducted such survey. This system was started from 1999 when the base year was revised from 1980-81 to 1993-94. In the case of many countries, however, the failure to update a base year which involves in-depth surveys of the structure of an economy, is due to lack of resources in terms of the statistical capacity of national statistics offices. This problem is compounded by the fact many emerging markets and lower income countries are economies where the structure of economic activity is changing most rapidly.
The base year chosen measures the structure of the economy in that year and future estimates of GDP are based on measuring changes in absolute price levels. However, since the structure of production and of relative prices over time are dynamic, the structure of the prices of products and the industries surveyed in the base year become less relevant over time. For some rapidly changing products (such as the smartphone in recent years) rapid technological change and relative price falls make any kind of comparison fraught with difficulty. This problem is greater with emerging markets since rapid growth in GDP and exposure to international trade patterns means that the balance of agriculture, for example, to manufacturing and services is changing rapidly. In the case of Nigeria, the number of industries measured by the statistics agency increased to 46 from 33 and the weighting of the different sectors changes. The share of agriculture in 2012 GDP decreased from 33% under the old base year to 22% in the new one. The share of the hydrocarbon sector declined from 37% to 16%, while the size of the service sector nearly doubled from 26% to 51%. Telecommunication services increased tenfold from only 0.8% of total GDP to more than 8% in the new figures because mobile phone use, which did not exist in 1990, had grown exponentially, since then. Entertainment services (including the booming Nollywood film industry) were estimated at 1% of GDP at market prices after the rebasing, while the sub sector was unaccounted for previously.
According to the United Nations System of National Accounts (UN SNA)-2008, the base year of Gross Domestic Product (GDP) series, needs to be revised from time to time to better capture structural changes in the economy. The member countries are required to revise the base year of their macro-economic indicators like Gross Domestic Product (GDP), Gross Value Added, Index of Industrial Production, and Consumer Price Index periodically, to better capture these structural changes in the economy. The United Nations recommends updating base years every five years, although, most developed countries now adopt the practice of chaining, where relative prices are updated every year. The more out of date a country’s base year, the more inaccurate are estimates of GDP and the lower a country’s score in the World Economics GDP Data Quality Ratings.
When GDP is revised and the base year is updated, it allows the statistician to reweight the relative importance of the different sectors of economic activity, and further change or reconsider the methods and data sources. Changes in estimates of the relative importance of different sectors allow for better policy decisions to be made on industrial, employment and international trade.
Furthermore, external investors into an economy can make more optimal decisions on capital flows whether by portfolio investment or FDI. Higher GDP at current market proces estimates inevitably change all economic variables that are expressed in terms of GDP. In the case of Nigeria, this beneficially affected measurements of its debt service burden reducing the public sector fiscal deficit and the public debt level as a percentage of GDP. The 2012 public debt level, for example, decreased from 19% of GDP to 11% of GDP due to the rebasing. In contrast, the rebasing and subsequent uplift of GDP lowered Nigeria’s external current account surpluses decreasing the country’s net external creditor position when compared to the size of the economy. Therefore, rebasing frequently does not only improve the accuracy of economic estimates, it can have significant economic consequences on a country’s sovereign credit ratings and on the cost of and access to loans by the government and by government related enterprises.
The World Economics global macroeconomics database which covers over 150 countries demonstrates that a failure to update base years regularly is a common feature of GDP data and therefore posits a serious problem affecting the quality of GDP estimates, particularly in emerging markets. See the World Economics GDP Data Quality Ratings
Estimates of GDP using data from a base year surveying the structure of the economy 10 or 20 years ago (as many countries do) as a basis for calculations of the size and shape of economic activity, is unlikely to produce reliable estimates of GDP. In countries that revise base dates after some interval, very large increases in GDP are usually recorded as was the case with Nigeria, highlighting just how inaccurate data is that has been produced using out of date base years.
Given the importance of accurate and relevant GDP estimates given the discussion above, World Economics has produced a simple methodology that can be used to update official GDP estimates when a base year is out of date. The method is based on an analysis of a database of examples of the impact of 28 tracked cases of rebasing on measured GDP over recent decades by country and the number of years the base year was out of date. The data is illustrated in Table 1 to 3 below which tracks cases of rebasing split by continent in Africa, Asia and the Americas. The tables list the previous base year, the rebased year, the number of years between rebasing, the measured percentage GDP uplift and the average uplift per year.
There is no continental table for Europe because of the predominance of chaining in this region which negates the need for rebasing exercises. The World Economics method of adjusting GDP upwards to account for out-of-date base years applies a standard uplift factor to published official GDP statistics, X% multiplied by the number of years the base year is out of date. Initially a global uplift factor was experimented with using a regression model, but differences between continents and testing the model demonstrated that it was better to use three different uplift factors. The average uplift per year was 2.4% for Africa, 1.5% for Asia and 0.7% for America and 1.5% was used 1.5% as a default for the Middle East. To give an example, with a base year of 1996, Sudan’s base year is 25 years out of date which means that official GDP should be adjusted upwards by 60% (2.4% x 25 years) to reflect what it might be after rebasing. This higher figure can then be applied to all the relevant investment assessment ratios using GDP.