Gross Domestic Product (GDP), its formula and components.
The most widely used National income and production account (NIPA) to track a country’s production or output in order to measure the economy’s’ strength is the Gross Domestic Product (GDP).
The GDP may be defined as the total Naira value of all final goods and services produced within a country at a particular period of time usually one calendar year. In calculating the GDP of a country, no account is taken of what it took in producing the goods and services and the nationality of those that produced the goods and services. The GDP is used as an indicator in determining whether the economy is experiencing economic growth, decline or stagnancy.
It is calculated as: GDP = AE = C + I + G
Where;
AE = Aggregate expenditure
C = personal Consumption expenditures
I = Investment
G = Government purchases of goods and services/expenditure
The three components of the definition of GDP will help you better understand what it says about a nation’s economy.
Final Output /goods & Services To avoid counting products more than once (double counting), economists include only the value of final goods and services when calculating GDP. The question is How is a good identified as “final”? Statisticians use the value added approach of the firms’ personal contribution to output. Let’s take the example below as a useful explanation,
| Commodity (Dress) | Sales ( ₦) | Value – added ( ₦) |
| Cotton Maker | 200 | 200 |
| Textile Manufacturer | 250 | 50 |
| Weave maker | 280 | 30 |
| Wholesaler | 350 | 70 |
| Retailer | 500 | 150 |
| Total = | ————————– | 500 |
The cotton maker sold the cotton which he harvested from his farm for ₦200 to the textile manufacturer who then put the cotton into use and turned it to a plain fabric. The textile manufacturer sold the fabric to the weave maker for ₦250 who refined the edges and then sold it to the wholesaler who bought it for ₦280. Later on, the wholesaler sold this same material to the retailer at the price of ₦350. But, at the end, the retailer sold the material to a customer at the price of ₦500.
The final output is the price at which the consumer buys it in the market or the price in which that particular good is being sold at last which is ₦500. Note: the final output price is equal to the sum of amount of value added by every firm.
Output produced within National Borders You should note that GDP measures only output produced within a nation’s borders regardless of who produced it. For example, the NASO Company in Nigeria may have different workers from different countries in the world. When the GDP is being calculated for the Nigerian economy, the services of the foreigners are included whether they are citizens of Nigerians or not.
Current Year GDP is a measure of production and not sales for a current year. So, sales of second hand items are not counted because these products have already been counted in the year in which they were produced. Thus, if a product is produced in 2015, it will be counted in the year of 2015, even if it is not been sold that year, hence if it is sold in 2016, it will not be accounted for any longer. Therefore, GDP does not include products like used cars or secondhand (okirika) clothing.
For information concerning the GDP and other statistical data of Nigeria, visit the Nigerian Bureau of Statistics website http://www.nigerianstat.gov.ng)
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