What does base-year normalization mean in a price index?

What does base-year normalization mean in a price index?

• A. The base year is always the year with the highest price.
• B. The index cannot be used for comparisons.
• C. The index value is set to 100 in the selected base year.
• D. The index value equals 50 in the base year.

Answer: (C)

Base-year normalization sets a reference year and anchors the price index so that the value in that year is 100. This creates a common baseline for comparing how price levels change over time. With this setup, other years show price changes as relative to the base year, for example 106 means prices are 6% higher than in the base year, while 98 means prices are 2% lower. The base year is a convention and can be changed by rebasing, but the point remains to provide a straightforward scale for comparison. The base year isn’t defined by the year with the highest price, the index can be used for comparisons across time, and it isn’t fixed at 50 in the base year.

Base-year normalization sets a reference year and anchors the price index so that the value in that year is 100. This creates a common baseline for comparing how price levels change over time. With this setup, other years show price changes as relative to the base year, for example 106 means prices are 6% higher than in the base year, while 98 means prices are 2% lower. The base year is a convention and can be changed by rebasing, but the point remains to provide a straightforward scale for comparison. The base year isn’t defined by the year with the highest price, the index can be used for comparisons across time, and it isn’t fixed at 50 in the base year.