Understanding Nigeria’s GDP (Gross Domestic Product) Simply

Nigeria, a nation of such vast riches and so much potential, is a force to be reckoned with in Africa and in global economies. In order to determine its economic heartbeat and map its course, one of the most readily available indicators we have is its Gross Domestic Product, or GDP. In spite of the ominous and sounding-like-it-should-be-in-a-science-lab title, in reality GDP is merely a crude approximation of economic activity within and surrounding a country. It is like the sum total report card for all goods and services generated within Nigerian borders over some specified time period, typically a year. Having Nigeria’s GDP, even in its most basic form, tells us something helpful about its economic health, growth rate, and general good health of its people.

If Nigeria were a prosperous bazaar. There are millions of individuals and businesses out there making a million things around the clock: producers making something, farmers tilling crops, sellers selling stuff, and service firms providing their services. The GDP is merely summing money value of everything that’s being traded in this market – from the tiny sachet package of water to the highest degree of oil importation, from the street fixer’s level to that of the expensive lawyer.

What Is GDP Actually Measuring?

In other words, Nigerian GDP is the total of all final goods and services being generated in the nation over a span of time, typically a quarter or twelve months. Let us divide these priceless definitions:

-Gross: That is, it includes prior to deducting the depreciation on capital assets (such as machinery and equipment) used in the production. Just think of it as the total production prior to taking into account the wear and tear on the tools used to create that production.

– Domestic: That is where the production must be in the economic space of Nigeria regardless of whether the producing entities are Nigerian or not. Therefore, as such, the production of a Lagos multinational company is in Nigeria’s GDP whereas that of a Nigerian company based in Ghana is not.

-Product: It is the ultimate goods and services that are manufactured and brought into sale in the market. Intermediate goods, or the goods used to make other goods (such as flour used in bread manufacturing is an intermediate good, but the ultimate loaf of bread is a final good), are not included in the measurement. They would introduce double counting and overestimation of GDP if included.

Hence, Nigeria’s GDP is aggregation of market values of all final supplies of goods and services – from farm produce and man-made goods to health, education, and financial services – supplied within territorial domains of the country over a timeframe.

Why is Nigeria’s GDP important?

It is important to know Nigeria’s GDP for several reasons:

1. Measurement of Economic Welfare: GDP is one of the best measures of the economic welfare of the nation. A rise in GDP is generally taken to mean that the economy is expanding, with more production, rising incomes, and even more jobs. Conversely, a falling GDP may mean slowing down in the economy, if not a recession, with falling output, lower incomes, and even joblessness.

2. Post Economic Growth: Relative relative levels of GDP over varied time periods are employed in monitoring whether the Nigerian economy is on the rise or decline. The steady positive rate of GDP growth remains a prevailing economic indicator of progress and growth. Experts monitor such trends quite closely with high interest to determine whether there is any expected economic policy impact from their desired scenarios and wherein there ought to be intervention measures.

3. International comparison: GDP enables the Nigerian economy to be compared with other countries in the world. This helps Nigeria’s place in the global economy to be ascertained, its strengths and weaknesses to be compared with those of similar countries, and guide international trade and investment.

4. Policy Formation and Analysis: Governments rely heavily on GDP data when developing economic policy and their effects. For example, if the rate of GDP growth is low, the government would implement monetary or fiscal policy to increase demand and stimulate output. If the rate of GDP growth is high and creates inflation pressure, the government would implement policies to slow down the rate of economic growth.

5. Investment Attraction: A rising GDP can also attract foreign as well as domestic investment. People prefer to invest more in healthy growth-potential economies and a healthy economic environment. Increased investment, again, can also accelerate further GDP growth as well as create more opportunities.

6. Business Decision-Making: Companies based their business decisions for market penetration, expansion, and utilization of resources on GDP figures. Access to general economic conditions and trends in progress enables firms to make decisions based on projected demand for goods and services and strategic decisions.

7. Living Standards under Constraint: GDP is highly a production measure, but occasionally it has been employed as a short cut to the overall standard of living in the nation. The newer Gross National Product (GNP) is sometimes used for this. Higher GDP per head (GDP/population) is likely to mean higher average income and even perhaps higher access to goods and services. Observe, though, that GDP per capita does not measure living standards or income distribution perse.

How is Nigerian GDP calculated?

There are three simple ways in which GDPs are calculated, and hopefully all will be the same figure:

1. The Expenditure Approach: It is the sum of all the final consumption spending on goods and services within Nigerian territory. It adds up these total expenditures of foreigners’ net expenditure, the government, households, and the business community. The formula for the expenditure approach is:

GDP = C + I + G + (X – M)

Where

-C is for consumption: Individual consumer spending on goods and services like food, clothing, transport, health, and education. Consumer spending in Nigeria contributes to GDP in considerable amounts.

-I is Investment: This is business spending on capital goods (i.e., building, equipment, and machinery) and investment change in stocks and consumer spending on new construction used for residential building. Investment generates future growth in the economy.

-G is Government Purchases: It is government spending across levels (federal, state, and local) on goods and services, such as public sector wages, public capital spending, and defense. Omit transfer payments such as unemployment or social security because they do not necessarily represent the outright purchase of newly created services or goods.

-X is Exports: This is the value of Nigerian services and products exported overseas. Nigeria’s biggest export is petroleum but also developing very fast are the non-oil exports.

-M is Imports: This is the value of foreign goods and services bought by Nigerians.

2. The Production (or Output) Approach: This estimate puts GDP as the entire sum of value added at each production step in every Nigeria industry. Value added is found as a final product value minus an intermediate input value of a company. It never double counts because it is merely adding new value added per step. For instance, in the manufacturing of bread, the added values of the wheat farmer, miller, baker, and the retailer are added together to find the final worth of the bread, and it is calculated in terms of GDP. This process can have the potential dis-aggregation of GDP into broad blocks of the economy such as agriculture, manufacturing, services, and mining (gas and oil in Nigeria’s scenario).

3. The Income Approach: It calculates the GDP by summing up all the incomes derived from factors of production in Nigeria. Incomes are wages and salaries (compensation of employees), profits (profits of incorporated and unincorporated enterprises), rent, and interest. Indirect business taxes (sales taxes) and depreciation are also included. The assumption behind the same is that the overall goods and services thus produced will be equal to the overall incomes earned thus in the process of production.

Statistical agencies such as Nigeria’s National Bureau of Statistics (NBS) in reality mostly adopt a blend of the above estimation methods of the GDP and establish accuracy through a method known as cross-checking.

Learn Nigeria’s sectoral GDP proportion

The economy of Nigeria is oil-dependent, although gradually freeing itself from this fact. Nigeria’s sectoral composition of its GDP teaches us why it does and where it is lacking in terms of growth. Its largest sectors are generally:

-Agriculture: Agriculture remains Nigeria’s largest employer and is equally as much a contributor to Nigeria’s percentage share of GDP. Agriculture includes crop production, animal production, forestry, and fishery. Percentage share of agriculture in GDP annually declined while other-sector distribution grew, though agriculture remains a commendable contributor so far as food security and rural livelihood are involved.

-Manufacturing, mining and quarrying (headed by crude oil and natural gas) dominate, and then comes construction and utilities (gas, water supply, and electricity). The oil and gas industry has cornered all the industry’s revenues and foreign exchange till date. However, while manufacturing industry remains thin today, its diversification and employment opportunities are devastating.

-Services: Widest and most rapidly growing sector of Nigeria’s GDP. It is a chain of services such as wholesale and retail trade, storage and transport, food and beverage service, and accommodation service, information and communication technology (ICT), insurance, and financial services, real estate service, professional, scientific, and technical service, administrative public services, education, and health. Growth in services sector, i.e., ICT and financial services, has been one of the most spectacular growths in recent times.

Their share of Nigerian GDP compared to the rest of the economy can still vary in the course of time according to one or more of the following: a change in world commodity prices (e.g., oil), a change in government policy, a change in technology, and a change in composition of the economy.

Factors Influencing Nigeria’s GDP Growth

Nigerian GDP growth depends on the level of complexity in the dynamics of some of the ensuing determinants:

-Oil Prices and Production: Over-valuation history of oil means that, to a great extent, Nigerian GDP responds to worldwide patterns of oil price and Nigerian production. Rise in oil prices and rise in production have the propensity to reverse rising PGP but to initiate slowing down or contracting growth when reversed.

– Government Fiscal and Monetary Policy: Nigeria’s fiscal and monetary policy are also influencing factors in how they can regulate economic activity and economic growth in relation to GDP. Some such policies to which one can turn with this objective are government spending, taxation, interest rate policy, exchange rate policy, and foreign trade policy.

-Infrastructure Development: Properly developed infrastructures like the communication infrastructure, transport infrastructure, and power supply infrastructure are required in the process to be in a position one can comfortably say there is economic growth and economic activity in the GDP of each industry. Properly under-developed infrastructure can significantly hamper discouraging economic growth.

-Direct Foreign and Domestic Investment: Direct foreign and domestic investment in people, technology, and capital machinery are the most important long-term drivers of growth in GDP. Foreign and domestic investment is the origin of long-term productive capacity and employment to a great extent.

-Consumption: Spending by households on consumption accounts for most of Nigeria’s consumer-oriented GDP.

-Performance of Non-Oil Sector: More suitable to GDP’s long-term growth and more immune to price-varying oil economy is manufacturing, agriculture, and services sector growth and diversification.

-Stability and Security: Politics, law and order, and security are involved while following a trend of economic activity and while undergoing the process of establishing an investment climate and then giving rise to follow-up GDP growth.

-Influence of Demographic Factors: Nigeria’s large and rapidly expanding population is both a blessing and a curse to GDP growth. It can be an economic giant if it must be brought under control by stabilizing employment and investment in human capital.

-Global Economic Trends: Global economic trends like global economic expansion, foreign trade flows, and commodity prices may conceivably be able to influence Nigeria’s GDP, in a material way by their effect on exports and investment.

GDP problems with the interpretation of Nigeria

Though GDP is highly useful, it is right to warn against the pitfalls and shortcomings in interpreting data of Nigeria’s GDP:

-Informal Sector: The bulk of Nigeria’s economic activity exists in the informal sector and may be hard to quantify with high levels of precision and even perhaps be underestimating in official GDP statistics. This could result in the economy being too small.

-Data Timeliness and Accuracy: Accuracy and timeliness of GDP data depend upon the pace of data collection and processing. Slow data collection and processing can determine the value, as well as credibility, of figures.

-Income Distribution: Per capita GDP provides an average income but not a distribution of income among individuals. Per capita GDP may be high but coupled with ghastly income inequality.

-Incomes: GDP records economic activity and not living standard such as well-being, environment, education, and health.

-Structural Changes: Structural adjustment within the Nigerian economy, either by emergence of new growth industries or contribution shift of sectoral contribution, in the long term could possibly raise problems from time to time in setting significant trends in GDP.

-Base Year Effects: Base year revisions to those made in calculating real GDP (inflation-adjusted) can have effects on growth rates as well as intertemporal comparison.

Conclusion: GDP as a Key Piece of the Puzzle

A knowledge of Nigeria’s Gross Domestic Product, as straightforward as it is, gives us one benchmark by which to judge the nation’s economic performance and trajectory. It is a wonderful tool for politicians, businessmen, investors, and citizens. While GDP is not perfect and needs to be used with some reserve in other contexts, it is a priceless tool on which to make decisions to use to evaluate economic well-being, monitor growth, and make rational choices.

With Nigeria being forced to economic diversification and growth, safeguarding its GDP and its drivers will be the way to ride out tough times, and also seeing opportunity and making life richer in Nigeria in the long run. Nigerian economic activity locked up in its “scorecard” locked up in its GDP says a lot about the country and is a signpost for what it can be and do. With the understanding of the derivation of GDP, we can discuss Nigeria’s economy more effectively and have a stronger voice on its behalf in the future.