Nigerians love clichés, and for the past few months, ‘consumption to production’ has been renting the wave with everyone trying to outdo each other in the use of the cliché. I have paid close attention to see if I can get anyone who could clearly explain their understanding of the cliché. I have waited and I am yet to find out.
I am an Economist by training; production and consumption are integral parts of what I come across in the course of my academic training and professional career.
Theoretically, a simple open economic model is represented as NI = C + I + G + (X-M)
Where NI = National Income
C=Consumption Expenditure
I = Investments(Savings)
G= Goverment Expenditure
X-M= Net Export(Difference btw Export and Import.
A very important determinant of the size of an economy is the magnitude of its consumption expenditure. A simple consumption function is a straight line equation represented as C = a + byd where a is autonomous consumption, which indicates your level of consumption at zero income level (which must be positive at all times). Yd is disposable income and b is the slope of the function.
Basically, everyone must consume, regardless of income. In truth, to be considered a big economy, the size of its consumption and production must be huge. High consumption indicates higher disposable income and thus higher propensity to spend. When people are not consuming, the economy will experience deflation, which is the opposite of inflation as we have seen in Japan in the last decade. The problem, however, is: what is the composition of the consumption and where do you source the majority of what you consume: Is it sourced from the domestic market or is it from importation?
On the other hand, Production function, in economics as an equation expresses the relationship between the quantities of productive factors (such as labour and capital) used and the amount of product obtained. The general production function formula is Q= f (K, L), Here Q is the output quantity, L is the labour used, and K is the capital invested for the production of the goods.
Producers create goods to satisfy the consumption wants of the people. If no one consumes, no one will produce. Consumption is thus the end of all productive activity. Consumption and production are two actions, which must occur in any economy. One can not give way for the other. They are not mutually exclusive as the cliche tends to make us believe.
Also, consumption along with investment determines the level of income and employment in the economy. If the consumption of goods and services does not increase, the demand for such goods and services will reduce, and it will lead to a fall in production.
I can go on and on about consumption hypotheses and various models of the production function. However, what I think is important at this point, with our population approaching 250m, leading to a possible increase in consumption is to raise our production level to MATCH or SURPASS our local consumption level, so we can export and manage our net export. If we focus on producing to export without matching local consumption, then we will still have a problem at hand. If we continue to consume without producing locally, we will still have a problem. The balance, however, is to increase local production to meet local consumption and export the net.
The cliche ‘consumption to production’ makes little sense in economics as the treatise has shown. We can only argue on the composition of our consumption. The proper cliche might be: ‘Increasing production to match and surpass local consumption’
Onyeagba (Ph.D) is the current Nigerian Ambassador to Burundi
