Why do we change the base year?

Question

Never, never, understood this.

I know what Nominal and Real GDP is, I know how the base year calculations work, my question still remains.

The idea behind real GDP that makes most sense to me is the one Smith came up with, which was the first conception of a GDP anyway. The point of the GDP seems to be that the amount of stuff people consume is a decent indicator of how well the country is doing. It's hard to give a small figure that can be grasped quickly of the amount of stuff people consume in units of xyz goods so we just give them weights equal to a price and add them together. So the weights clearly seem to indicate how much more "consumptiony" one good is compared to the other, I guess the prices are a decent indicator of how "important" one good is relatively (debatable).

So we take these weights (prices) in one year and say "we'll use these" from then on. So an increase in the GDP can only ever indicate people consuming more stuff.

But if we keep changing base year prices, the Real GDP get's a boost despite people not consuming more stuff, it's even possible people consume less stuff and the Real GDP still increases, only because people are throwing more money at goods, probably because the central bank threw more money into the economy.

So what exactly is this change in base year supposed to capture?

Answer 1

The change in base year keeps the dollar values meaningful to contemporary readers. If we still used, say, 1900 as the base year for US GDP, the dollar values for today would be so tiny they would essentially be meaningless 'GDP units', which would make it harder for people to visualize what the numbers really mean.

Note that, when the base year changes, historical GDPs go up, not just going-forward GDPs. So the 1900 US GDP, in 'constant' 2010 dollars, is about 10x as high as the NGDP for that year, to reflect inflation over the 20th century; but that number does a much better job of conveying to readers living in 2016 what conditions in the US in 1900 were really like than using 1900 dollars would.

Answer 2

The change in base year is meant to give a more realistic picture of the change in price level in the economy.

As time progresses, there are changes in people's disposable incomes, employment structure of the economy etc. If the base year is not revised to reflect the recent economy, we will not get an accurate picture of the economy today.

Just to give you an example, let's say the base year was kept at 1960, and it's 2016 right now. Then the change in the price level would be really high, which wouldn't really give you an accurate picture of how the economy is doing right now.