For the second time in less than 10 years Ghana’s GDP has seen a huge increase as a result of a change in the base year used in the calculation. But what does it mean, and what implications does it have for the country. I explain all of that in this post.

What is rebasing of GDP?

GDP or Gross Domestic Product is the market value of all final goods and services produced in a country within a period of time (usually a year). It is used by economists as a measure of the performance of an economy and is the most widely used statistic in comparing the economies of different countries. GDP is NOT a measure of how much wealth, mineral resources or currency in circulation that a country has. As a measure of living standards it is imperfect, and the Human Development Index (HDI) is a better measure.

GDP can be measured by the income, expenditure or production approach. The most used method is the production approach which adds up the value of all goods and services produced in the economy less all intermediate goods plus indirect taxes and minus subsidies. The result is a reflection of how much an economy has been able to produce which is what is known as GDP.

As one might think, it is very possible that the GDP of a country can increase just by the fact that prices have increased. If we produce 10 bags of maize at ¢5 each, our GDP is ¢50. If we produce those same 10 bags next year but increase prices to ¢6, then we would have had an artificial increase in GDP to ¢60. In order to avoid this artificial increase, a country’s statistical agency selects one year whose prices would be used to value all products produced in subsequent years. This ensures that it is only an increase in production which will result in an increase in GDP. This year chosen by the statistical agency is known as the base year. The GDP with changes in prices not accounted for is called the nominal GDP. And when prices are accounted for by reference to a base year, it is called real GDP.

The base year plays an important role in determining the size of a country’s GDP. If it’s too old a year, the classification of activities in the sector and exclusion of new sectors could significantly misstate the true GDP of a country. In 2010, the base year used for Ghana’s GDP calculation was changed from 1993 to 2006. The country’s GDP jumped by 60% and the services sector was recognized as the largest contributor to GDP, replacing Agriculture. The recent change of the base year from 2006 to 2013 has resulted in a 24.6% jump in GDP to GH¢256 billion.

What are the implications for the economy?

One reason why governments like a large GDP is that it gives them a larger capacity to borrow. There are many reasons why I think debt-to-GDP is a misleading statistic, however it remains one of the first statistics an investor looks at when they are deciding whether to purchase a government’s bonds or not. A larger GDP means the country’s debt-to-GDP ratio will fall and therefore it will be able to borrow more.

However, a higher GDP means that Ghana’s tax-to-GDP will look smaller than it currently is. This is going to make the government increase its efforts to raise revenue through reform of existing taxes and a greater push for compliance.

A larger GDP also means that the country is likely to see a rise in measures of living standards compared to other countries in the region. This could lead to more investment as our economy looks more attractive to foreign investors looking for a place in emerging markets to start a business.

The rebasing is also likely to inspire other African countries like Nigeria and Kenya to rebase their own GDPs as they did in recent years after Ghana’s rebasing.

If you have further questions, please share in the comments below and I will be happy to answer.