In economics and finance, we often use percentages to measure data from various points in time.
Let’s say that in the year 2010, 1 lakh automobiles were sold in India. The next year, 1.2 lakh vehicles were sold in India.
As a result, sales increased by 20% year over year.
The growth can be measured in percentage terms per year.
Let’s say the sales were terrible for a year.
For eg, in 2012, they only sold 50,000 vehicles.
They sold 1 lakh vehicles the next year, in 2013.
When comparing the year’s revenue in 2013 and 2012, the increase is a whopping 50%.
However, the true development isn’t there. The cars sold in 2013 are close to those sold in 2010.
It’s just that 2012’s earnings were so poor that the return to normalcy seems to be a very large percentage increase.
This is called the low base effect.
When evaluating some percentage statistic, we must be aware of this effect.
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