What are the desirable properties of the base period?
The base period should have the following desirable properties:
First, the base year should be as normal as possible. Years having extreme values should not be selected as the base year, as such years do not represent a typical economic situation and would distort comparisons.
Second, the base period should not belong to too far in the past. A comparison between 1993 and 2005 is much more meaningful than a comparison between 1960 and 2005. This is because many items in a 1960 typical consumption basket have disappeared at present. Therefore, the base year for any index number is routinely updated to ensure meaningful comparisons.
Explanation
The textbook clearly outlines three key properties of a good base period: (1) it must be a normal year without extreme values, (2) it should not be too distant in the past, and (3) it needs to be updated periodically. These properties ensure that the index number provides meaningful and relevant comparisons over time.