Why is the GDP so different from one another when you use a different base year to calculate the GDP?
(Ex. using 2001 as base year to calculate 2019 GDP and then using 2019 as base year to calculate 2019 GDP)
Firstly, it is important to understand two very basic terms, which are :
1) GDP (Gross Domestic Product) :It can be described as a monetary tool used in the market to measure the final market value of all the goods and services, which are produced for a period of time (Mainly annually). GDP helps in differentiating between various economies and helps the nation to decide their actual performance of the financial year. However, GDP cannot determine the standard of living of any country as it has no tool to measure that.
2) Base Year: Imagine every year is so different from the other, hence the basis of comparison becomes extremely difficult. In such a scenario, base year comes in the picture. Every nation chooses a base year for a specific period of time. Normally an year which is divisible by 5 is chosen as the base year. The reason of choosing a base year is that it helps the economy to compare the growth from year to year by keeping the parameters same.
However, The GDP (Gross Domestic Product) is way different from each other, when a different base year is used to calculate the GDP, this is because there are different prices in the base year and to calculate the GDP,we must multiply the quantities of the goods and servicesof that financial year with the prices used in the base year.As different years, have very different price level, so as and when we end up calculating by using different base years, with change in price, the GDP also changes.