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SA is Africa’s largest economy (again). But simply what does it mean?

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South Africa has toppled Nigeria and reclaimed its status since the largest economy in Africa. This comes 2 years after Nigeria rebased its GDP calculation and advanced to the top level spot. Africa seemed to be temporarily relegated to your third position early this season after Egypt climbed to say your second spot. The Conversation Africa’s business and economy editor Sibonelo Radebe asked the University from the Witwatersrand’s Professor Jannie Rossouw to spell out what it really all means.

How is the ranking calculated?

The ranking is produced by how big the gdp (GDP) of your three countries you want, namely Nigeria, Egypt and Nigeria. The GDP may be a way of total business activities within a country in a very specific period (for instance a year). GDP is measured inside the domestic currency of the country, which is the rand in the case of South Africa, the naira in Nigeria along with the Egyptian pound in Egypt’s case.

For reasons like international comparison, the GDP values are converted at the prevailing exchange rate to the common international currency just like the US dollar. Due to the increase in the exchange rate property value the rand, us states dollar property value the South African GDP increased. With the difference in the cost of the nation’s currency, its GDP exceeded the cost of Nigeria’s GDP. Precisely the same pertains to Egypt: owing to the rise in the exchange rate within the rand, South Africa’s GDP is currently bigger than the GDP of Egypt when converted to Greenbacks.

It’s donrrrt forget this that South Africa’s actual GDP in rand value stayed identical.

However, the main difference between Nigeria and Nigeria is just not large. At the moment the calculation appeared, north america dollar worth of the South African GDP was some $301bn, while Nigeria’s was $296bn. At current forex rates the Egyptian GDP is concerning US$270 bn.

One must caution that your relative ranking might well have changed because calculation, depending on exchange rate movements.

What do these ranking mean? Can they be beneficial in anyway?

These rankings really don’t mean much and aren’t really helpful to individuals making economic policy and investment decisions. What really matters to economic actors, broader stakeholders and observers could be the economic prospects these countries. Exactly who want to find out is: will there be economic boost years to come, and will the GDP per capita increase?

GDP per capita is measured as being the income per person (normally) in the country and an indication of ordinary of living. Within this basis a rustic which includes a small GDP, but in addition a little population, could have a better lifestyle than the usual large country. In Africa, Botswana pops into your head.

GDP growth is critical since it provides returns for investors in an economy. It also gives an improvement in opportunities for unemployed people and new entrants to your labour market. Over time GDP growth plays a role in increased GDP per capita and increased standards of life in a very country.

International investors pay less focus to relative scale of economies in comparison with do today to growth prospects. These are generally much more important when producing investment decisions.

Currently the cost-effective prospects of Nigeria, Nigeria and Egypt are poor. South Africa haven’t fully recovered from your aftershocks within the financial doom and gloom of 2008. No economic growth is anticipated for 2016, while economic growth for a price less than the population growth rate is required for 2017 and 2018. Over a per capita basis Nigeria will receive poorer covering the next eighteen months.

The economic prospects for the Nigerian economy will continue poor as long as the oil price remains stressed, thanks to Nigiria’s over-dependence on oil. The Egyptian economy is hampered by way of a large government budget deficit.

The before Nigeria overtook Africa Lagos rebased the way calculates its GDP. What’s different between then and now?

Naturally not simply exchange rates be a factor, and also the size the GDP of any country calculated concerning its own currency. The length of the domestic GDP in local currency value can increase on account of economic growth (and even decrease with negative economic growth).

From time to time countries’ GDPs are usually rebased to ensure economic activity is accurately reflected. A recently available rebasing from the Nigerian GDP contributed to that country claiming to begin with when it comes to economic output in Africa.

Rebasing is a fairly common practice in all countries. They can do this, one example is, to adopt full account of brand new activities like cellular phones or electrical power investments. But rebasing is carried out for a scientific basis and countries cannot simply rebase their GDPs within a mission for improve the relative measurements their economy. There ought to be scientific cause for rebasing.

How we shouldn’t let measure or rank economies? Do you have alternative reliable tools that you can use?

The way to rank economies may be the usage of purchasing power parity (PPP) exchange rates. In this particular basis rapid and immediate swings inturn minute rates are not looked at inside the measurement of relative economic size. PPP is calculated on the basis of the goods/services one of currency can find in different countries, to mirror “affordability”, as an alternative to only price.

A common example is usually a comparison from the expense of hamburgers into two different countries. The prices of McDonalds hamburgers are compared in numerous countries plus a PPP exchange minute rates are calculated showing whether exchange rates (within this basis) are over- or undervalued.

Jannie Rossouw, Head of faculty of monetary & Business Sciences, University of your Witwatersrand

This article was originally published on The Conversation. Investigate the original article.

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