GDP: Let’s get real

• South Africa
• Coronavirus, COVID-19, Economics, GDP, Inflation, Nominal GDP, Nominal Growth, Real GDP, Real Growth, South Africa
• March 25, 2020

You’ve probably heard the term “GDP” many times before, but do you actually know what it is and why it is so important?

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This isn’t the simplest concept in the world, so let’s start with the basics.

GDP stands for Gross Domestic Product, which (despite the name) has nothing to do with your baby’s nappy. Instead, it tries to measure the economic achievement of any given country within a specified period.

Economists and policymakers usually focus on quarterly GDP i.e. measuring success every 3 months. This allows for some smoothing over time, because a monthly measure would be a lot more volatile.

Imagine if your parents got a report every single time you wrote a test? That’s why we use longer periods to measure these things.

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It’s very important to understand the difference between Nominal GDP and Real GDP. The only difference between these numbers is whether inflation is stripped out or not.

Let’s assume R10bn worth of wine was produced this year. It’s possible that R10bn worth of wine was also produced back in say 2015. It looks as though wine production has been steady, but it may have gone backwards in “real terms” because of inflation.

If the inflation rate was 5% per year, R10bn in 2015 is equivalent to just over R12bn in 2019.

If 2019 production was R12bn, we would say that there has been ???????? ???????????????? ???????????????????????? because it has simply kept up with inflation. If it was less than R12bn, there has been ???????????????????????????????? ???????????????? ???????????????????????? i.e. production volumes have gone backwards. More than R12bn would represent ???????????????????????????????? ???????????????? ???????????????????????? and therefore a genuine increase in production.

To strip out inflation from any industry figures, Stats SA must choose a base year. Numbers are then reported as either “current prices” (nominal) or “constant prices” (real).

Reporting 2019 figures at 2015 prices allows you to quickly see whether there has been a genuine improvement in production.

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Although our inflation rate target overall is 3% – 6%, this is the average inflation rate across a variety of products and services. Inflation per industry can vary significantly e.g. food prices can be far higher in times of drought. After the 2008 financial crisis, food inflation in South Africa was running at over 15%.

Stripping out inflation takes volatility out the number and enables a proper measure of how the country is doing.

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South Africa has achieved very little real growth in the past few years. Sadly, an economic shock like COVID-19 could set the country back 5 or 6 years in terms of total wealth.