Base Year Analysis
Base year analysis definition
Base year analysis is defined in two ways depending on the use to which it will be put. For the U.S. government, the base year analysis definition refers to general economic factors including the gross national product and the producer price index. Individual corporations use base year analysis figures to compile an accurate picture of corporate profits or losses in constant dollars.
At the heart of base year analysis computation is the idea of constant dollars. Also known as real dollars, constant dollars provide a way to compute the real value of a specific sum or asset over a period of time. Inflation, deflation, and other factors typically skew the actual worth of money over time; for example, one dollar in today’s currency would not purchase the same amount of goods and services as that same dollar in the year 1960 or even the year 2000. Thus, the nominal or face value of a unit of currency does not accurately reflect its worth when measured against that same currency in differing economic conditions. By converting these unequal dollars to their actual worth in one benchmark year, economic analysts can calculate the value of constant dollars and make useful comparisons between separate years with disparate financial situations.
Base year analysis in economic analysis
It is obvious that measuring the gross national product of 1920 against the gross national product of 2000 cannot be accomplished simply by comparing the dollar amounts attributed to each. Some calculation of the relative worth of those dollars must be achieved and the resulting figures compared in order to make an accurate assessment. Typically, macro economists choose a specific year as a benchmark; this may be the current year or any other year that suits the purpose of the comparison. For instance, in the comparison above, economic analysts might choose to convert 1920 dollars to 2000 dollars, or vice versa; they might even elect to use a completely different year entirely. Base year analysis requires only that the real value, rather than the nominal value, is being compared. In this way, an accurate comparison of two different time periods can be achieved.
Base year analysis for corporate evaluations
Just as with governmental analysis of economic indicators, private companies also use base year analysis to determine the company’s real growth or loss over a period of years. By using constant dollars to determine the company’s level of spending, profit margin, and capital assets, corporate financial analysts can provide an accurate overview of the company’s ongoing financial situation. This allows the company to adjust its policies and tailor its spending and investments to promote continued growth while offering a more accurate and complete financial picture for its shareholders.