You must have seen it in the news earlier this week the announcement of the tremendous increase (almost doubled) in the Nigeria’s Gross Domestic Product (GDP) by the National Bureau of Statistics. Even though economist and analyst have disagreed in this new figure, it is long due on the basis of which NBS calculated it. The announcement will also have some practical implication on the Nigeria economy whether, the figure is window dressed as believed by some citizen or not. One of the implications includes the psychological impact on foreign investor. But this is not my focus in this post today; I will look at the implication in details in my next post or the one after my next.
Today’s post will be focused on the practical meaning of Gross Domestic product (GDP) as the most important macroeconomic indicator and why it is so important in a non-technical language. My aim of doing this is for you to understand what this figure usually reported in percentage really mean before you make comments or form an opinion on the announcement by NBS.
GDP is what I can also describe as National Output referring to the total amount of goods and services a country produces in monetary terms (Naira value). This figure is like a snapshot of the economy at a certain point in time. It (GDP) is one of the primary macroeconomics indicators to measure the health and wealth of the country’s economy – you may also say is the size of the economy. GDP is usually expressed as a comparison to the previous period such as quarter or year. For example NBS announced a rise in GDP from $270bn to $510bn which represents 89% increase; this means the economy has grown by 89% over the years.
Measuring GDP is complicated (which is why we leave it to the economists), but from a lay man’s perspective, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. Since it is assumed that what you earn is what you spent apart from savings.
When referring to GDP, macroeconomists tend to use real GDP, which takes inflation into account, as opposed to nominal GDP, which reflects only changes in prices. The nominal GDP figure will be higher if inflation goes up, so it is not necessarily indicative of higher level of output only by higher prices of goods and services. So I am only referring to real GDP in this post.
The one demerit of the GDP is that because the information has to be collected after a specified time period has finished, a figure for the GDP today would have to be an estimate. Once a series of figures is collected over a period of time, they can be compared over periods. Of course; these figures can be compared across economies as well. Hence, we can determine which foreign countries are economically strong or weak.
Based on past figures, analysts and investors can then begin to forecast the future state of the economy which can also be use for the basis of business and investment decisions. It is important to remember that what determines human behaviour and ultimately the economy can never be forecasted accurately.