- By Segun Ajibola
Gross Domestic Product (GDP) measures the quantum of economic activities in a country, in monetary terms, over a period of time usually one year. Real GDP eliminates the impact of inflation by applying a deflator to convert nominal or market GDP to the real figure. There are other ways of accounting for the volume of economic activities. Gross National Product (GNP) is distinguished from GDP in that while GDP speaks about the economic activities that take place in the domestic economy whether conducted by foreigners or nationals, GNP sums up the economic activities conducted by nationals of a country wherever they live across the globe. GDP finds favour among economic analysts and policy makers because it denotes the quality and quantity of economic activities supported by the domestic economy. GDP is also less cumbersome to compute as the required data are available within a domestic economy unlike GNP that involves inter-jurisdictional data gathering.
There are three approaches to GDP computation
– Income Approach – This is the sum total of all incomes earned by partakers in economic activities over the period. Incomes earned by factors of production such as wages and salaries from labour, rent from land, interest from capital and profits from entrepreneurship are summed up to give the GDP figure.
– Output Approach – This is a summation of the monetary values of all goods and services produced in the economy over the period
– Expenditure Approach – This is the total sum of all expenditures on consumption, investment, government and net exports for the period.
The three approaches must give the same figure if properly computed with minimal omissions and commissions.
GDP especially when measured in real terms (having eliminated the impact of inflation) and referred to as Real GDP (RGDP) is a powerful barometer for measuring the state of health of an economy. Persistent rise in RGDP denotes real growth in the economy and sets the stage for economic development. If an economy records negative growth in real GDP for two consecutive quarters, then the economy is said to be in recession. This was the case with Nigeria in 2016 and the COVID-19 induced one of 2020. If the negative growth in RGDP lingers beyond two quarters, then economic depression sets in.
GDP is a powerful tool of analysis. In the domestic economy, it is used for planning purposes, both by the public and private sector operators. Sectoral activities are hinged on GDP figures. Budgeting and other fiscal and monetary measures take a cue from GDP figures. The international community assesses the economy based on the highlights of the GDP. International financial institutions, trading partners, creditor nations, rating agencies, etc all make use of GDP figures to determine the nature of their relationship with each country.
Calculation of GDP, real and nominal, is hinged on what is referred to as Base Year. That is the year which prices are adopted to calculate the GDP figures in subsequent years. You therefore come across such statement as “GDP at year 2000 constant prices”. This is to say that the GDP figure quoted in say 2023 was based on the prices of goods and services as at year 2000. The base year chosen has tremendous impact on the GDP figure arrived at. A base year of say year 2010 would give higher GDP figure compared with a base year of year 2000 because of the increases in the prices of goods and services over the same period.
Nigeria’s current GDP is calculated using 2010 as the base year. Prior to that, Nigeria was stuck with a base year of 1990, about twenty years prior. When Nigeria’s GDP was rebased in 2014 with 2010 as the base year, it catapulted the economy to number one in Africa. At the moment, Nigeria’s economy is ranked as number four in Africa, coming after Egypt, South Africa and Algeria. Nigeria is ranked 39th in the world by nominal GDP. Accordingly, Nigeria is muting the idea of moving her base year to 2019 to provide a more realistic framework for computing her GDP.
Another critical factor for GDP ranking is the adoption of common convertible currency, the dollar to reduce GDP figures across the globe to a common denominator. Unfortunately, countries confronted with instability in foreign exchange rates, marked more by currency depreciation/devaluation are prone to negative impact on their GDP figures. Nigeria’s GDP is calculated locally in Naira. For comparative purposes, it has to be converted to US dollar at the going official exchange rate.
Another issue is the scope of economic activities permissible in the computation of the GDP. Some economies allow underground albeit illegal economic activities in the GDP. Such activities include gambling, drug trafficking, prostitution, kidnapping, smuggling, etc. The extent to which some of these items are included in the calculation of GDP affects the size of the GDP. Countries of the world including UK, Italy, USA are reviewing the possibility of accommodating some of these otherwise ‘illegal’ activities in their GDP. Some African countries are also in the same trap.
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In the recent past, the debate over the inclusion of the otherwise underground activities in the computation of Nigeria’s GDP gained currency. Nigeria is confronted with a large chunk of activities that is left out of the GDP computation. Many therefore believe that the GDP figure often credited to the country is grossly understated. So much is happening through black marketeering, smuggling, drug business, gambling, terrorism, etc that are regarded as illegal and left out of the GDP. But bringing such activities into the arena of official GDP poses monumental challenges:
– First is the nature of the activities. There are laws of the land that prohibit any form of engagements in such activities such as Anti-Money Laundering Act, Anti-Terrorism Act, laws on illegal mining, gambling, cybercrimes, financial and economic sabotage, etc. How will these activities become permissible in the calculation of Nigeria’s GDP in the face of the deluge of laws against them?
– Information on such activities is held back by the players. How will the authorities on data gathering such as CBN, NBS gather data on prostitution, drug trade, etc?
Besides the legal and technical hurdles come the social, cultural and religious inclinations against such practices. Some religious beliefs see them as haram (forbidden). Those engaged in such activities are seen as social deviants that are derided by the society. Attempts to accommodate them in GDP would be viewed as assault on the social, moral and cultural fabrics of the Nigerian society. Africa, albeit Nigeria, upholds traditional moral values and norms which majority would view as sacred and untouchable.
To avoid such impending war on the moral values of the Nigerian people, and the tumultuous legislative journey towards legalizing the illegalities, there are several other areas the authorities can look into to reduce the glaring omissions in the Nigeria’s GDP computation. Several activities as performed by full time housewives, nannies, housemaids, houseboys, gardeners, drivers, washmen, etc are often left out of GDP computation. These are huge activities in a country like Nigeria. Goods and services consumed by the producers, such as subsistence farmers, parents serving as lesson teachers to children and wards, etc are hardly reckoned with. Operators in the informal sector are largely left out of the GDP. Market men and women in Alaba, Oyingbo, Idumota, Mile 12 markets in Lagos, Sabongari market in Kano, Onitsha, Nnewi markets, etc hardly keep records or file returns. These are glaring areas of omission in GDP computation, in addition to a deluge of others. Authorities should think out more effective ways and design more encompassing template for capturing these legal but informal economic activities to boost the actual size of the Nigeria’s GDP.
•Professor Ajibola is Professor of Economics, Babcock University, Ogun State & Past President, Chartered Institute of Bankers of Nigeria
