MEASUREMENT OF ECONOMIC GROWTH

WRITTEN BY

LUCKY NWAKEGO UGBOKO

DEPARTMENT OF BUSINESS ADMINISTRATION

FACULTY OF MANAGEMENT SCIENCES

UNIVERSITY OF CALABAR

CALABAR

JUNE, 2016

TABLE OF CONTENTS

Pages

Table Of Contents i

Abstract ii

1.0 Introduction 1

2.0 Review of Related Literatures 1

2.1 Conceptual and Theoretical Issues 1

3.0 Key Measurement of Economic Growth 2

3.1 Gross Domestic Product (GDP) 2

3.20 Analytical Frameworks 3

3.21 Computing GDP 3

3.3 National Income And GDP 3

3.4 GDP vs. GNP 4

3.5 Growth Rate of GDP 5

3.6 Effect of Inflation on GDP 6

3.7 Real GDP vs. Nominal GDP 6

3.8 GDP Deflator 7

3.9 GDP Per Capita 8

4.0 Nigerian GDP from 1980 to 2014 9

5.0 Conclusion and Recommendations 10

References 11

Abstract

This paper examines the measurement of economic growth in Nigeria as measured by

real gross domestic product (RGDP).

The author defined GDP and explained its concepts as the key national economic

growth measure. Other complex related matrixes associated with GDP were

simplified in this paper to enable easy comprehension and appreciation of the concept

of economic growth measurement.

Time series data obtained from IMF for a period of 34 years, that is, 1980 to 2014 was

used. The result shows that there has not been any significant economic growth in

Nigeria as measured using GDP for the period under review.

The paper recommended that there is need for government to consciously develop the

business environment by provision of necessary infrastructure, which will lower the

cost of doing business in Nigeria. Government is also required to formulate sound

monetary and fiscal policies to mitigate the negative effects of inflation on economic

growth and also to create an enabling industrial environment to minimised industrial

actions, which hampers productivity if economic growth is to be achieved.

Keywords: Economic Growth, National Income, Gross Domestic Product (GDP),

Gross National Product (GNP), Growth Rate of GDP, Real GDP, Nominal GDP,

GDP Deflator, GDP Per Capita

1. Introduction

Economic growth is a fundamental requisite to economic development. This informs

why in Nigeria, economic growth continuously dominates the main policy thrust of

government’s development objectives.

Essentially, economic growth is associated with policies aimed at transforming and

restructuring the real economic sectors. Nevertheless, the lack of sufficient domestic

resources, savings and investment to support and sustained the sectors are major

impediments to economic development in most developing countries because of the

gap between savings and investments (Imimole and Imoughele, 2012).

Savings provides developing countries (including Nigeria) with the much-needed

capital for investment, which improves economic growth. Increase in savings leads to

increase in capital formation and production activities that will lead to employment

creation and reduce external borrowing of government. Low domestic saving brings

about low-growth levels as suggested by Harrod Domar model, savings is an

important factor for economic growth (Essien, 2002).

2.0 Review of Related Literatures

2.1 Conceptual and Theoretical Issues

According to Aigbokhan (1995), Economic growth means an increase in the average

rate of output produce per person usually measured on a per annum basis. It is also the

rate of change in national output or income in a given period.

Economic growth is the increase of per capita gross domestic product (GDP) or other

measure of aggregate income. It is often measured as the rate of change in real GDP.

Economic growth refers only to the quantity of goods and services produced. Thus

Economic growth is an increase in real gross domestic product (GDP). That is, gross

domestic product adjusted for inflation. The growth can either be positive or negative.

Negative growth can be referred to as a shrinking economy, which is characterised

with economic recession and depression.

Ullah and Rauf (2013) noted that whenever there is increase in real GDP of a country

it boosts the overall output resulting in economic growth. The study of economic

growth is important to a nation as it helps to analyse the increase/decrease of the

incomes of the society, the effects of unemployment and productivity as well as the

deliveries of public services.

3.0 Key Measurement of Economic Growth

3.1 Gross Domestic Product (GDP)

“The Gross Domestic Product measures the value of economic activity within a

country. Strictly defined, GDP is the sum of the market values, or prices, of all final

goods and services produced in an economy during a period of time.

There are, however, three important distinctions within this seemingly simple

definition:

i). GDP is a number that expresses the worth of the output of a country in local

currency.

ii). GDP tries to capture all final goods and services as long as they are produced

within the country, thereby assuring that the final monetary value of everything that is

created in a country is represented in the GDP.

iii). GDP is calculated for a specific period of time, usually a year or a quarter of a

year.

Taken together, these three aspects of GDP calculation provide a standard basis for

the comparison of GDP across both time and distinct national economies.” (Spark

Notes, 2014)

3.20 Analytical Frameworks

3.21 Computing GDP

Having dealt with the definition of GDP, it is pertinent to understand how to compute

it. We know that in an economy, GDP is the monetary value of all final goods and

services produced. For example, let’s say Country Z only produces Cocoa and Gold.

YearPrice of Cocoa

Quantity of Cocoa

Price of Gold

Quantity of Gold

1 N1 5 N6 5

2 N2 10 N6 7

3 N3 10 N6 9Figure 1: Goods and Services Produced in Country Z

In year 1 they produce 5 tons of Cocoa that are worth N1 each and 5 pounds of Gold

that are worth N6 each. The GDP for the country in this year equals (quantity of

Cocoa X price of Cocoa) + (quantity of Gold X price of Gold) or (5 X N1) + (5 X N6)

= N35.

As more goods and services are produced, the equation lengthens. In general, GDP =

(quantity of A X price of A) + (quantity of B X price of B) + (quantity of whatever X

price of whatever) for every good and service produced within the country.

3.3 National Income And GDP

In the real world, the market values of many goods and services must be calculated to

determine GDP. While the total output of GDP is important, the breakdown of this

output into the large structures of the economy can often be just as important. In

general, macroeconomists use a standard set of categories to breakdown an economy

into its major constituent parts; in this instance, GDP is the sum of consumer

spending, investment, government purchases, and net exports, as represented by the

equation:

Y = C + I + G + NX

Because in this equation Y captures every segment of the national economy, Y

represents both GDP and the national income. This is because when money changes

hands, it is expenditure for one party and income for the other, and Y, capturing all

these values, thus represents the net of the entire economy.

Let’s briefly examine each of the components of GDP.

Consumer spending, C, is the sum of expenditures by households on durable goods,

nondurable goods, and services. Examples include clothing, food, and health care.

Investment, I both local and foreign direct investment (fdi), is the sum of expenditures

on capital equipment, inventories, and structures. Examples include machinery,

unsold products, and housing.

Government spending, G, is the sum of expenditures by all government bodies on

goods and services. Examples include naval ships and salaries to government

employees.

Net exports, NX, equal the difference between spending on domestic goods by

foreigners and spending on foreign goods by domestic residents. In other words, net

exports describe the difference between exports and imports.

 3.4 GDP vs. GNP

GDP is just one way of measuring the total output of an economy. Gross National

Product, or GNP, is another method. GDP, as said earlier, is the sum value of all

goods and services produced within a country. GNP narrows this definition a bit: it is

the sum value of all goods and services produced by permanent residents of a

country regardless of their location. The important distinction between GDP and GNP

rests on differences in counting production by foreigners in a country and by nationals

outside of a country. For the GDP of a particular country, production by foreigners

within that country is counted and production by nationals outside of that country is

not counted. For GNP, production by foreigners within a particular country is not

counted and production by nationals outside of that country is counted. Thus, while

GDP is the value of goods and services produced within a country, GNP is the value

of goods and services produced by citizens of a country.

For example, in Country Z, represented in, Cocoa are produced by nationals and Gold

are produced by foreigners. Using figure 1, GDP for Country B in year 1 is (5 X N1)

+ (5 X N6) = N35. GNP for country Z is (5 X N1) = N5, since the $30 from Gold is

added to the GNP of the foreigners’ country of origin.

The distinction between GDP and GNP is theoretically important, but not often

practically consequential. Since the majority of production within a country is by

nationals within that country, GDP and GNP are usually very close together. In

general, macroeconomists rely on GDP as the measure of a country’s total output.

3.5 Growth Rate of GDP

GDP is an excellent index with which to compare the economy at two points in time.

That comparison can then be used formulate the growth rate of total output within a

nation.

In order to calculate the GDP growth rate, subtract 1 from the value received by

dividing the GDP for the second year by the GDP for the first year.

GDP growth rate = [(GDP2)/(GDP1] – 1

For example, using, in year 1 Country Z produced 5 tons of Cocoa worth N1 each and

5 pounds of Gold worth N6 each. In year 2 Country Z produced 10 tons of Cocoa

worth N1 each and 7 pounds of Gold worth N6 each.

In this case the GDP growth rate from year 1 to year 2 would be:

[(10 X N1) + (7 X N6)] / [(5 X N1) + (5 X N6)] – 1 = 49%

3.6 Effect of Inflation on GDP

There is an obvious problem with this method of computing growth in total output:

both increases in the price of goods produced and increases in the quantity of goods

produced lead to increases in GDP. From the GDP growth rate it is therefore difficult

to determine if it is the amount of output that is changing or if it is the price of output

undergoing change.

This limitation means that an increase in GDP does not necessarily imply that an

economy is growing. If, for example, Country Z produced in one year 5 tons of cocoa

each worth N1 and 5 pounds of gold each worth N6, then the GDP would be N35. If

in the next year the price of bananas jumps to N2 and the quantities produced remain

the same, then the GDP of Country Z would be N40. While the market value of the

goods and services produced by Country Z increased, the amount of goods and

services produced did not. The problem of Inflation can make comparison of GDP

from one year to the next difficult as changes in GDP are not necessarily due to

economic growth.

3.7 Real GDP vs. Nominal GDP

In order to deal with the ambiguity inherent in the growth rate of GDP,

macroeconomists have created two different types of GDP, nominal GDP and real

GDP.

Nominal GDP is the sum value of all produced goods and services within a country at

current prices. This is the GDP that is explained in the sections above. Nominal GDP

is more useful than real GDP when comparing sheer output, rather than the value of

output, over time. Whereas Real GDP is the sum value of all produced goods and

services produced within a country at constant prices. The prices used in the

computation of real GDP are gleaned from a specified base year. By keeping the

prices constant in the computation of real GDP, it is possible to compare the

economic growth from one year to the next in terms of production of goods and

services rather than the market value of these goods and services. In this way, real

GDP frees year-to-year comparisons of output from the effects of changes in the price

level (inflation).

 The first step to calculating real GDP is choosing a base year. For example, to

calculate the real GDP for in year 3 using year 1 as the base year, use the GDP

equation with year 3 quantities and year 1 prices. In this case, real GDP is (10 X N1)

+ (9 X N6) = N64. For comparison, the nominal GDP in year 3 is (10 X N2) + (9 X

N6) = N74. Because the price of Cocoa increased from year 1 to year 3, the nominal

GDP increased more than the real GDP over this time period.

3.8 GDP Deflator

When comparing GDP between years, nominal GDP and real GDP capture different

elements of the change. Nominal GDP captures both changes in quantity and changes

in prices. Real GDP, on the other hand, captures only changes in quantity and is

insensitive to the price level. Because of this difference, after computing nominal

GDP and real GDP a third useful statistic can be computed.

The GDP deflator is the ratio of nominal GDP to real GDP for a given year minus 1.

In effect, the GDP deflator illustrates how much of the change in the GDP from a base

year is reliant on changes in the price level.

For example, let’s calculate, using, the GDP deflator for Country Z in year 3, using

year 1 as the base year. In order to find the GDP deflator, we first must determine

both nominal GDP and real GDP in year 3.

Nominal GDP in year 3 = (10 X N2) + (9 X N6) = N74

Real GDP in year 3 (with year 1 as base year) = (10 X N1) + (9 X N6) = N64

The ratio of nominal GDP to real GDP is (N74 / N64) – 1 = 16%.

This means that the price level rose 16% from year 1, the base year, to year 3, the

comparison year.

Rearranging the terms in the equation for the GDP deflator allows for the calculation

of nominal GDP by multiplying real GDP and the GDP deflator. This equation

demonstrates the unique information shown by each of these measures of output. Real

GDP captures changes in quantities. The GDP deflator captures changes in the price

level. Nominal GDP captures both changes in prices and changes in quantities. By

using nominal GDP, real GDP, and the GDP deflator you can look at a change in

GDP and break it down into its component change in price level and change in

quantities produced.

3.9 GDP Per Capita

GDP is the single most useful number when describing the size and growth of a

country’s economy. An important thing to consider, though, is how GDP is connected

with standard of living. After all, to the citizens of a country, the economy itself is

less important than the standard of living that it provides.

GDP per capita, the GDP divided by the size of the population, gives the amount of

GDP that each individual gets, on average, and thereby provides an excellent measure

of standard of living within an economy. Because GDP is equal to national income,

the value of GDP per capita is therefore the income of a representative individual.

This number is connected directly to standard of living. In general, the higher GDP

per capita in a country, the higher the standard of living. GDP per capita is a more

useful measure than GDP for determining standard of living because of differences in

population across countries. If a country has a large GDP and a very large population,

each person in the country may have a low income and thus may live in poor

conditions. On the other hand, a country may have a moderate GDP but a very small

population and thus a high individual income. Using the GDP per capita measure to

compare standard of living across countries avoids the problem of division of GDP

among the inhabitants of a country.

4.0 Nigerian GDP from 1980 to 2014

YearGross domestic

product, constant prices

YearGross domestic

product, constant prices

YearGross domestic

product, constant prices

YearGross domestic

product, constant prices

1980 2.872 1989 6.467 1999 2.8 2010 9.969

1981 20.8381990 12.766 2000 7.701 2011 4.887

1982 -1.0531991 2.206 2001 7.035 2012 4.279

1983 -5.051992 3.209 2002 6.898 2013 5.394

1984 -2.0221993 4.835 2003 11.889 2014 6.31

1985 8.3231994 3.552 2004 8.791

1986 -8.7541995 2.236 2005 8.677

1987 -10.7521996 7.606 2006 8.327

1987 -10.7522007 9.061

1988 7.5431997 5.298 2008 8.014

1988 7.5431998 5.15 2009 8.971

Source: International Monetary Fund, World Economic Outlook Database, April 2015

5.0 Conclusion and Recommendations

In their work on Macroeconomic Determinants of Economic Growth in

Nigeria: A Co-integration Approach, Ismaila and Imhoughele (2015) have this

conclusion to make “there is need for government to consciously develop the business

environment by provision of necessary infrastructure, which will lower the cost of

doing business in Nigeria”, this will encourage investment both locally and foreign

direct investment (FDI) and hence productivity.

They further advised government to formulate tight monetary and fiscal policies in

order to fight inflation in the Nigerian economy, “since inflation have negative

influence on investment and Nigeria economic growth”.

Industrial actions have been rampant in recent times taking its toll on national outputs

(productivity), government must ensure a conducive industrial environment to enable

non-stop production.

Finally, government should encourage stability in macroeconomic variables and

employ such growth oriented and stabilization policies especially at macro level,

which will induce economic growth and development.

References

Aigbokhan, B.E. (1995). Macroeconomic: Theory Policy and Evidence. Benin City: Idenijies Publishers.

Essien, E.A. (2002). Nigeria’s Economic Growth: Performance and Determinant. CBN Economic and Financial Review, 40.(3).

Imimole, B. and Imuoghele, L.E (2012). Impact of Public Debt on an Emerging Economy: Evidence from Nigeria (1980 – 2009). International Journal of Innovative Research and Development. 1(8).

Ismaila, Mohammed & Imoughele, Lawrence Ehikioya. (2015). Macroeconomic Determinants of Economic Growth in Nigeria: A Co-integration Approach. International Journal of Academic Research in Economics and Management Sciences (2015), 4 (1): 2226-3624

Spark Notes (2014). Measuring the Economy – Gross Domestic Product (GDP) (online)Available:http://www.sparknotes.com/economics/macro/measuring1/section1.html (April 8, 2014)

Ullah, F & Rauf, A. (2013). Impacts of Macroeconomic Variables on Economic Growth: A Panel Data Analysis of Selected Asian Countries. GE-International Journal of Engineering, Research available on line at www.gejournal.net