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Explainer: What does GDP actually mean, and how does it affect you?

GDP is not a measure of the overall standard of living or well-being of a country.

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Explainer: What does GDP actually mean, and how does it affect you?

There are several technical jargons and acronyms peculiar to many professions. In economics, one of the most common acronyms used is GDP, which stands for Gross Domestic Product.

It is often cited in business news across newspapers, radio, television news, and in reports by governments, central banks, and the business community.

It is widely used to measure the health of national and global economies. According to Tim Callen, the Divisional Chief in overseeing IMF’s Middle East and Central Asia Department,“When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not.”

READ: Nigeria’s unemployment rate jumps to 27.1% as at 2020 Q2

Back story: Recall that Nairametrics had reported, on Monday, that Nigeria’s Gross Domestic Product (GDP) in real terms declined by 6.10% (year-on-year) in Q2 2020, thereby ending the 3-year trend of low but positive real growth rates recorded since the 2016/17 recession.

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According to the numbers contained in the GDP report, the performance recorded in Q2 2020 represents a drop of 8.22% points when compared to Q2 2019 (2.12%), and 7.97% points decline when compared to Q1 2020 (1.87%).

Apparently, the significant drop reflects the negative impacts of the disruption caused by the COVID-19 pandemic and crash in oil price on the Nigerian economy.

READ: Crypto: Why Tether became a U.S. dollar replacement for many Chinese

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What is GDP?

GDP is the monetary value of final goods and services (i.e those that are bought by the final user), produced in a country in a given period of time; per quarter or year. It counts all the output generated within the borders of a country, and is composed of goods and services produced for sale in the market. It is important to note that it also includes some non-market production like defence or education services provided by the government.

Its twin, Gross National Product (GNP), counts all the output of the residents of a country. For instance, if a German-owned company has a factory in Nigeria, the output of this factory would be included in Nigeria’s GDP, but in Germany’s GNP.

However, not all productive activity is included in GDP. Some of such activities are unpaid work (work performed at home or by volunteers) and black-market. They can’t form part of GDP because they are difficult to quantify or value accurately. For instance, a food vendor that cooks for a customer would contribute to GDP but won’t if he cooks at home for the family.

Also, wear and tear of Capital stock like machines, buildings, which are used in producing the output are not inclusive in GDP. If this depletion of the capital stock, called depreciation, is subtracted from GDP, we get the net domestic product.

How GDP is calculated

  • Production approach: This adds the value-added, which is the total sales – the value of intermediate inputs into the production process) at each stage of production. What is an intermediate input? Flour would be an intermediate input and bread the final product, or an architect’s services would be an intermediate input and the building the final product.
  • The expenditure approach adds up the value of purchases made by final users. For example, “The consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners,” Callen added.
  • The income approach: This sums the incomes generated by production. According to the expert, this is the compensation paid to employees, rent paid to landowners, interest paid on capital, and profit paid to the company owners.

GDP in a country is usually calculated by national statistical agencies, which is the National Bureau of Statistics in the case of Nigeria. The agency compiles the information from a large number of sources.

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In making the calculations, however, most countries follow established international standards. The international standard for measuring GDP is contained in the System of National Accounts, 1993, compiled by the International Monetary Fund, the European Commission, the Organisation for Economic Co-operation and Development, the United Nations, and the World Bank.

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Real GDP

Since GDP gives information about the size of the economy and how an economy is performing, one thing people want to know about an economy is whether its total output of goods and services is growing or shrinking.

But because GDP is collected at current, or nominal prices, one cannot compare two periods without making adjustments for inflation.

To determine “real” GDP, its nominal value must be adjusted to take into account price changes to allow us to see whether the value of output has gone up “because more is being produced or simply because prices have increased. A statistical tool called the price deflator is used to adjust GDP from nominal to constant prices.”

The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

Callen said, “When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets. But real GDP growth does move in cycles over time.

“Economies are sometimes in periods of boom, and sometimes periods of slow growth or even recession (with the latter sometimes defined as two consecutive quarters in which output declines).

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What GDP is not

It is also important to understand what GDP cannot tell us.

GDP is not a measure of the overall standard of living or well-being of a country. Why? Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being.

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GDP is generally not a good measure of economic development. GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology.

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Generally, there are five indicators that GDP doesn’t take into account that could help measure national progress more accurately and these include: job quality (underemployment /unemployment), well-being, carbon emissions, inequality, and human health.

Abiola has spent about 14 years in journalism. His career has covered some top local print media like TELL Magazine, Broad Street Journal, The Point Newspaper. The Bloomberg MEI alumni has interviewed some of the most influential figures of the IMF, G-20 Summit, Pre-G20 Central Bank Governors and Finance Ministers, Critical Communication World Conference. The multiple award winner is variously trained in business and markets journalism at Lagos Business School, and Pan-Atlantic University. You may contact him via email - [email protected]

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Economy & Politics

Kano State presents N147.9 billion budget for 2021 fiscal year

Governor Ganduje has presented the total sum of N147.9 billion as Kano State’s proposed budget for 2021 fiscal year.

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Dala Inland Dry Port set to take off after N2.3 billion investment - Kano Govt., DB to support 1.26 million farmers with $95 million

Kano State Governor, Abdullahi Ganduje has presented the total sum of N147.9 billion as its proposed budget for 2021 fiscal year before the Kano State House of Assembly today.

Presenting the budget tagged “Budget for Economic Recovery and Sustainable Development,”Governor Ganduje said the budget is in furtherance of his administration’s vision for diversification of the state sources of revenue which will engineer development in the future.

Backstory: Recall that Nairametrics had earlier reported the drive and optimism by Kano State government to boost its Internally Generated Revenue. This might probably explain why IGR increased by almost 10% between 2020 allocations and proposed estimates for 2021.

What you should know: The breakdown of the budget verified by Nairametrics showed the following key highlights:

  • The total budget increased by approximately 7.0% from N138.279 billion in 2020 to N147.935 billion in 2021.
  • Capital expenditure for the periods under view increased by 10.93% from N60.485 billion to N67.095 billion.
  • Recurrent expenditure also increased from N77.79 billion to N80.839 billion, indicating a 3.92%. increase for the periods under view.
  • Internally Generated Revenue (IGR) increased by approximately 10% from N24 billion to N26.395 billion during the period under view.
  • A breakdown of the budget showed that the Education sector has over N37 Billion representing 25% of the total budget while the health care delivery service has over N25 Billion representing 17% of the total budget.

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Economy & Politics

Why Okonjo-Iweala should win the WTO DG role – Prof. Moghalu

Professor Kingsley Moghalu has thrown support behind Dr. Ngozi Okonjo-Iweala to win the World Trade Organization top job.

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Why Okonjo-Iweala should win the WTO DG role- Prof. Moghalu

A former Deputy Governor of the Central Bank of Nigeria, Professor Kingsley Moghalu, has publicly canvassed support for Dr. Ngozi Okonjo Iweala to win the World Trade Organization (WTO) top job.

The former professor of public policy at Fletcher School, Tufts University, made the disclosure via his official Twitter handle, as seen by Nairametrics

READ: WTO: Okonjo-Iweala invites volunteers, says she has no money for PR firm

Prof. Moghalu made a strong case for why Africa’s candidate should be considered for the top shot, noting that the need for Africa to get a better deal in the world trading system should be a major criterion in selecting the next WTO DG. He also believed that correcting this negatively skewed trade deal will help tackle poverty and underdevelopment in Africa.

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READ: WTO: Nigeria’s Ngozi Okonjo-Iweala gets European Union support

What you should know

Nairametrics had earlier reported that Nigeria’s Ngozi Okonjo-Iweala and South Korea’s Yoo Myung-hee have emerged as the last two candidates for the top WTO job.

Prof. Moghalu also disclosed that the final selection decision is expected this week or very early next week.

(READ MORE:WTO DG: Okonjo-Iweala gets the backing of 79 countries so far)

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Prof. Moghalu said, “The dynamics of world trade are rigged against Africa, keeping the continent poor and undeveloped. In this piece for Project Syndicate @ProSyn, I make a strong case for why Africa’s candidate, @NOIweala, should be selected as the next Director-General of @wto.

“The final selection decision is expected this week or very early next. Alongside the case for why the African candidate Okonjo-Iweala is best placed to lead WTO, I make the case for the continent more broadly as to how and why it must get a better deal in the world trading system.”

READ: WTO accepts nomination of Okonjo-Iweala as DG despite opposition from Egypt

What this means

If finally selected for the top job, the opportunity will present Dr. Okonjo the platform to solve some global trade-related issues, one of which is Africa’s trade position with the rest of the world.

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Economy & Politics

Buhari in crucial meeting with Obasanjo, other former heads of state

President Buhari is presiding over a National Security Council meeting with some former heads of state and some security chiefs.

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Buhari in crucial meeting with Obasanjo, other former heads of state

President Muhammadu Buhari is currently presiding over a National Security Council meeting with some former heads of state and some security chiefs.

READ: Obasanjo opens garment factory, competes with Nike Art Gallery, Sam & Sara 

Although the agenda of the meeting is not made public, issues bothering on the current security situation in the country are believed to top the agenda. This follows the outbreak of violence across the country during the protest against police brutality and extra-judicial killings, which has led to the loss of lives and destruction of public assets and private properties.

READ: Update: Buhari seeks power to freeze accounts, clamp down on money launderers

According to media reports, the meeting which is coordinated from the Council Chamber of the Presidential Villa, Abuja, has in virtual attendance General Yakubu Gowon (rtd.), former President Olusegun Obasanjo, Gen Abdulsalami Abubakar (rtd.), former President Goodluck Jonathan and former head of interim national government, Chief Ernest Shonekan.

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READ: #EndSARS: Feminist Coalition raise Cryptos worth $126,000

Others who are physically present at the council chambers are Vice President Yemi Osinbajo;  National Security Adviser, Major General Babagana Monguno (rtd.); Chief of Defence Staff, General Gabriel Olanisakin; Inspector-General of Police, Mohammed Adamu; Director-General, Department of State Services, Yusuf Bichi; and Director-General, National Intelligence Agency, Ahmed Rufai, among others are attending with the President.

READ: #EndSARS: Buhari holds National Security Council meeting with Osinbajo, IGP, others

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This meeting is coming a day after President Buhari’s national broadcast on the security situation in the country calling for an end to the #EndSARS protests as their voices have been loudly heard.

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Details later…

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