Re: Everything is NOT Zia’s fault – here are 6 reasons why
Base rate and its effect on real percentage GDP growth rate: Value of currency changes every year. Effect is that, currency of one year is not same as another year. For instance rupee of 2000 is not same as rupee of 2001, and similarly rupee of 2001 is not same as rupee of 2002. Currency value over time depreciates due to inflation … and so on. Let look at simple example.
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Now if base year is 2000 than:**
If inflation between 2000 and 2001 was 8 % than Rs 100.00 of 2000 = Rs 108.00 of 2001.
If inflation between 2001 and 2002 was 5 % than Rs 108.00 of 2001 = Rs 113.40 of 2002.
If inflation between 2002 and 2003 was 4 % than Rs 113.40 of 2002 = Rs 117.94 of 2003.
If inflation between 2003 and 2004 was 6 % than Rs 117.94 of 2003 = Rs 125.01 of 2004.
If inflation between 2004 and 2005 was 5 % than Rs 125.01 of 2004 = Rs 131.26 of 2005.
If inflation between 2005 and 2006 was 4 % than Rs 131.26 of 2005 = Rs 136.51 of 2006.
If inflation between 2006 and 2007 was 6 % than Rs 136.51 of 2006 = Rs 144.70 of 2007.
If inflation between 2007 and 2008 was 7 % than Rs 144.70 of 2007 = Rs 154.83 of 2008.
If inflation between 2008 and 2009 was 6 % than Rs 154.83 of 2008 = Rs 164.12 of 2009.
If inflation between 2009 and 2010 was 9 % than Rs 164.12 of 2009 = Rs 178.89 of 2010.
If nominal GDP in 2009 was Rs 9000 billion then real GDP (in rupee of 2000) would be Rs 5483.79 billion … as every Rs 164.13 of 2009 would be Rs 100 of year 2000.
If nominal GDP in 2010 was 10260 billion then real GDP (in rupee of 2000) would be Rs 5735.37 billion … as every Rs 178.89 of 2010 would be Rs 100 of year 2000.
Real GDP growth would be (5735.37 divided by 5483.79) multiply by 100 = 4.587 percentage point.
Now let change the base rate from 2000 to 2005 and see what happens:
Then from above figures … instead of working out value in rupee of 2000, we work out value in rupee of 2005. So … keeping inflation rate same as above and nominal GDP (or 2009 and 2010) same as above.
If inflation between 2005 and 2006 was 4 % than Rs 100.00 of 2005 = Rs 104.00 of 2006.
If inflation between 2006 and 2007 was 6 % than Rs 104.00 of 2006 = Rs 110.24 of 2007.
If inflation between 2007 and 2008 was 7 % than Rs 110.24 of 2007 = Rs 117.96 of 2008.
If inflation between 2008 and 2009 was 6 % than Rs 117.96 of 2008 = Rs 125.03 of 2009.
If inflation between 2009 and 2010 was 9 % than Rs 125.03 of 2009 = Rs 136.29 of 2010.
So, if nominal GDP in 2009 was Rs 9000 billion (as it was in above example) then real GDP would be Rs 7198.27 billion … as every Rs 125.03 of 2009 would be Rs 100 of year 2005.
If nominal GDP in 2010 was 10260 billion (as it was in above example) then real GDP would be Rs 7528.07 billion … as every Rs 136.29 of 2010 would be Rs 100 of year 2005.
Real GDP growth would be (7528.07 divided by 7198.27) multiply by 100 = 4.582 percentage point.
So, you can see the effect of changing base rate from 2000 to 2005. You will notice that real GDP changed (has increased) not because it really changed (or increased), but because the value is now quoted in Rupee of year 2005 instead of Rupee of year 2000 (or value increased by 32.26 percentage point as due to inflation, rupee value of year 2007 was 32.26 percentage lower in value then rupee value of 2000).
But as far as percentage increase in real growth rate is concerned, no changed happened (as change in base rate do not effect percentage increase in real GDP growth rate), because real growth rate is not dependent on base year but it depends on the figure of previous year.