After the COVID-19 period, economy makers took a general stance, focusing on “GDP growth” and emphasizing that their economies were growing and developing (!) more than in the past. Today we will discuss one of the biggest wizardries of politicians, the “Base Effect in the Economy,” and explain it with easy examples.
Mathematics sometimes gives us the opportunity to make magnificent models with little footwork because mathematics has no emotions or ethics; it is the people who use the language of “mathematics” who should have them. Perhaps after reading this article, you will be able to apply this illusion in another area of your life. Maybe you will look back and thank me (unlike your lover and boss).
The base effect is the illusion that occurs in parameters that mathematically refer to the previous year (usually after periods of crisis). Since economics is a science that generally proceeds with comparative parameters and makes use of the analyses that arise from them, it often refers to these parameters. At this point, saying “Look, we are going straight!” to a boat going straight after leaving a stormy sea is actually a short summary and anecdote of the base effect.
Let New Ozalonia prefer a closed economy model as an island country in the Pacific, so that our national income formula (in terms of expenditures) will be depicted as follows:
Y= C+I+G
Y: National Income
C: Consumptions (for Households and Firms)
I: Investments (including all economic actors)
G: Government Expenditures (All expenditures made by the central authority)
The country of Ozalonia had a great harvest and such a high production factor that the land gave it 100 cabbages in one year (in 2018).
The country of Ozalonia had a great rainy season, and in one year (2019), it harvested 120 cabbages, increasing its national income by 20% in terms of output.
The country of Ozalonia, in the grip of a catastrophic drought, has suffered a huge loss of production during this period, and (in 2020) was able to produce only 60 Cabbages, reducing its national income by 50% and reducing its output.
The country of Ozalonia, which somehow overcame this drought within a year, produced 90 cabbages in the following year (2021), increased its national income by 50% in terms of output, and economic parameters signaled a recovery (!)
Well, at the end of 2021, the Minister of Economy of the Ozalonia Country, Mr. Wise Bard, who gave a conference, came out and said:
“Our economy has never grown like this before; we left many countries behind us by growing by 50% last year.” “We are stronger now!”
If he makes a statement, will he be lying? The answer is, unfortunately, no. The math will justify what he says at the nominal level. Remember that it is not the math but the people who apply it who must have a conscience!
However, if you look at the situation at the output level, the lie will be exposed, because even though the country of Ozalonia has grown by 50% in terms of real output, it is still below the level of real output in 2018, the base year.
Study Case: GDP Growth and Base Effects in Turkey
* 2001-2022 (2001 Crisis)
* 2009-2010 (2008 Crisis)
* 2020-2021 Years (Covid-19 Quarantine)
CONCLUSION
Mathematics is a language, for economics as well as for other sciences, and lying is certainly not the fault of the spoken language. People tell lies, and words (data) come from language. This is why many hoaxes and illusions such as the “Base Effect” have come to the minds of some “human beings” who practice these sciences, not the sciences that study them. Even though we, as economists, are aware of this, it is very important for the people who participate in democracy through elections to have this knowledge. Because nobody wants to be deceived and have their right to vote taken away by an illusion, right? Therefore, we should pay as much attention as possible to the base effect and work with real variables in some parameters as much as possible. Remember, sometimes what looks great on paper can make you suffer in practice. I dedicate this remark not only to the field of economics but also to you, my readers, politicians, the public, and most of all to myself.
Best Regards and Wishes
