Monthly Archives: April 2014

GDP Stack of Coins

Nigeria’s Economy Largest in Africa : What is GDP Rebasing?

The Nigerian National Bureau of Statistics completed its GDP-rebasing exercise last weekend, the result of which shows that Nigeria’s 2013 GDP is 89% higher than was previously calculated, and Nigeria has overtaken South Africa as the largest economy on the continent. A number of us are wondering what this all means – let us go through the following story about Hauwa and her business.

Hauwa is a business owner. Seun, her business accountant, has the list of her 5 business bank accounts, as well as the list of the 10 products she sells; these lists were compiled 20 years ago.  Every year, Seun checks these bank accounts to collate how much Hauwa’s business received as payments for selling these products between 1 January and 31 December, i.e. her Annual Sales.  He also notes the breakdown of how much each product contributed to her Annual Sales.  Seun uses this information to communicate with Hauwa’s business stakeholders: lenders, shareholders, and the general business community.  In 2013, his calculation of her Annual Sales based on this list of accounts and products was N100.00, with Product A contributing 50% to this amount.

In a recent conversation, it comes to Seun’s knowledge that Hauwa’s business has accounts that are not on the list he has been working with:

Hauwa: “So, you need to go and withdraw some money from Bank A to pay our supplier in Aba.”

Seun: “But madam, we do not have an account with Bank A…”

Hauwa: “We do o, I opened an account with them 3 years ago when we started buying raw materials from Mr. X.”

Seun: “Ehen…  Ok.  Please send me the details of the account so I can update the records and make the payment as you have requested.  How about this outstanding amount from Customer D?”

Hauwa: “Customer D paid last week now, he paid into our account with Bank Q.”

Seun: “Bank Q ke?  Madam, did you recently open an account with Bank Q too?”

Hauwa: “You mean you didn’t know?  I opened an account with Bank Q 5 years ago when we started collecting payment for the use of advertising space on our delivery trucks.”

Seun: “So, we are now making money from advertising too?  Madam, I think it will be a good idea for us to go through the list of bank accounts so you can update me on the new accounts that have been opened, the account managers, and the accounts that are no longer in use.  Also, we need to update the list of all revenue sources.”

Hauwa: “In fact, let’s get to it immediately – long overdue!”

After completing the updates, Seun’s lists now show that Hauwa’s business has 8 bank accounts, sells 23 products, and now offers a number of services that it did not offer previously.  Based on the updated lists, Seun re-calculated the Annual Sales in each of the last 3 years; the result of this exercise shows that Hauwa’s 2013 Annual Sales was actually N185.00, Product A’s contribution had fallen to 15%, and the largest contribution came from Service B.

Note that:

  1. This does not mean that Hauwa’s business is any wealthier than before; it does not mean that her business has suddenly received an additional N85.00 – it had already been paid.
  2. Since Hauwa’s Annual Sales figure is calculated as the sum of all the deposits into her bank accounts, it does not mean that her bank balance on 31 December 2013 was N185.00.  The amount of money remaining in Hauwa’s bank accounts on 31 December 2013 will depend on the withdrawals that Hauwa made to pay her employees’ salaries, buy new equipment and uniforms, fund training for herself and other employees, pay for security, etc.  In fact, Hauwa’s balance on 31 December 2013 may actually have been negative, which would have required her to borrow money.
  3. Hauwa’s employees will not experience any change in their welfare packages.

Now that Hauwa has a more accurate picture of her Annual Sales in recent years, as well as each product and service’s contribution, she can plan more effectively:

  • she now knows which products and services to push more to increase their contribution;
  • she also knows the products and services that appeal most to her customers;
  • she can identify new business opportunities;
  • she can now make a more effective spending plan because she has a better idea of how much she will make in 2014;
  • her business is now more attractive to investors and creditors, thus increasing the ability of her business to earn more money; and
  • her bragging rights have increased – she now knows that her business received more in sales than that of Akin, her neighbour down the road, and she can now rub shoulders with those who previously thought she was not in their league.

Hauwa now needs to use this updated information to:

  • plan how to continue sales growth;
  • take advantage of opportunities;
  • spend on increasing productive capacity of herself and her employees;
  • improve her employees’ welfare packages; and
  • identify and plug leaks that cause money to “disappear”.

In this analogy,

  • Hauwa’s business is the Nigerian economy;
  • her products and accounts are the various industries and sectors;
  • her Annual Sales represent Nigeria’s Gross Domestic Product (GDP);
  • Seun is the National Bureau of Statistics, the agency responsible for calculating and reporting the country’s GDP and other economic statistics;
  • the process of updating Seun’s lists is GDP Rebasing;
  • Hauwa’s employees and their families are the Nigerian citizens; and
  • Akin’s business represents the South African economy :-).

If you’re interested in the technical details of what GDP means and how it is calculated, read my note on GDP Calculation.

Got a comment, question?  I look forward to reading your note below, or you could send a private message to comments@finomics101.com.

Advertisements