GDP Calculation

A nation’s Gross Domestic Product (GDP) is the sum of the market values of all goods and services produced within the nation’s geographical borders during a given time period, usually a calendar year.  It does not matter whether or not the individuals / entities that produced these goods and services are indigenes of this nation, as long as the production / service delivery was conducted within the country’s shores.

GDP is usually compiled by the national statistics agency – in Nigeria this is the National Bureau of Statistics (NBS).  Periodically, usually once a quarter, this statistics agency would poll a set number of companies, individuals, and other productive entities to obtain information about their production and consumption patterns, as well as current market prices of goods and services.  To make this process practical, the economy is divided into subsets called sectors or industries, and each of these subsets is apportioned a weighting based on that sector’s impact on the economy.

For example, in Nigeria, the current biggest employers of labour outside of government are the financial services and telecommunications industries.  Hence, the financial services and telecommunications industries would be apportioned a higher weighting than mining, which is not as active and does not employ as many people.

In order to calculate its GDP, a nation will need to set a base year – also called a reference year.  This provides a reference point for the economic composition of the country, i.e. the industries to be measured, as well as their assigned weightings.

 

GDP Rebasing

Over time, with technology improvements and changing tastes and opportunities, a nation’s economic composition changes.  In order to capture the full value of economic activities at every point in time, the nation’s reference point needs to be regularly updated; if not done, the resulting GDP will be an inaccurate reflection of on-the-ground realities:

• new industries will not be captured, e.g. Nigeria’s Nollywood that barely existed 20 years ago;
• older industries that have undergone fundamental changes will be inaccurately presented, e.g. from a monopoly where there was only one company – as was the case in Nigeria’s telecommunications industry where there was only NITEL – to a fully liberated and deregulated setup where there are more actively competing companies;
• extinct industries would remain on the list, using up resources to report very low or zero levels of economic activity.

This process of updating the economy’s GDP calculation reference point, i.e. base year, to more accurately reflect current economic activities and present a more accurate GDP figure, is what is termed by economists as “GDP Rebasing”.  Ideally this process is carried out 2 to 3 times in a decade, i.e. every 3 to 5 years.  The last time Nigeria conducted this exercise was over 24 years ago, so it was long overdue!

 

Impact of GDP Rebasing

In terms of Naira and kobo today, there is no impact on the lives of Nigeria’s people or the Nigerian economy.  However, the potential future benefits are immense, as long as we plan properly, and do not allow the hijack of our plans by selfish and malicious interests.

 

For an analogy of what all this means, read Hauwa’s story.

 

For more information about what GDP does and does not capture, visit this IMF article.