What is Base Effect?

Why in news?

• The rise was aided by base effects as November 2021 had clocked just 1% growth, but also marked a 6% uptick in output levels over October 22, which incidentally recorded the lowest level for the Index of Industrial Production (IIP) since November 2021.

What is a Base Effect?

• The base effect is the impact that selecting a different reference point for a comparison between two data points can have on the comparison’s outcome.
• For Eg: In the context of inflation, the base effect is a distortion in a current inflation figure caused by exceptionally high or low levels of inflation in the previous reference period.
• If the inflation rate was low in the corresponding period of the last year, then even a small increase in the price index will give a high rate of inflation in the current year.
• When comparing two data points, choosing a reference point will be crucial as the base effect can highly distort or mislead the interpretation of numbers.
• The base effect could also result in major differences in percentage comparisons. If we chose a reference point that is too low, there could be an overestimation and if the base is too high, it could result in gross underestimation of the situation.

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Index of Industrial Production (IIP)?

• The Index of Industrial Production (IIP) is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time.
• Who publishes IIP? The IIP index is computed and published by the Central Statistical Organisation (CSO) under the Ministry of Statistics and Programme Implementation on a monthly basis.
• Currently IIP figures are calculated considering 2004-05 as base year.

Q1) What is the Price Index?

 A price index is a measure of the average change in the price of a basket of goods and services over time. It is used to track inflation.

Source: Industrial output bounced back to rise 7.1% in November