Policy Brief No. 01 of 2014 on Rebasing GDP: Rationale and the Economic Implications

Abstract

A country's Gross Domestic Product (GDP) changes in size, structure and composition over time. GDP is the total value of all goods and services produced within the country's borders over a period of one year, valued either at current prices or constant base year prices. Prices of goods and services change over time, such that the same banana that cost Ksh 5 three years ago may seem more valuable today at Ksh 10, yet it is the very same banana. To avoid this misconception of value change, simply due to price changes without a concomitant change in volume of GDP, a base year is chosen when prices are stable and GDP of subsequent years is then measured at the base year prices. This gives only real changes in volume or quantity of goods and services. Removing effects of inflation or price changes by using base year prices is referred to as deflation.