The Estimation Of Potential GDP Growth Rate In China

The growth of potential GDP is not only a continuing topic in scholarly macroeconomicresearch, but also a keenly focused reference among policy makers. Therefore, estimating therate of potential GDP growth of a certain country (region) plays an important role inunderstanding the economic status of a country and in developing tailored economydevelopment strategy. Specifically, the implications are twofold. In the short term, accurateestimation of potential GDP growth facilitates the analysis of supply-demand status,evaluation of inflationary pressure, and ultimately regulation and control of short-termeconomic fluctuations by adopting targeted policy measures. In the mid-long term, it servesas reference for national economic strategy and policy making.Referring to Solow growth model and exogenous growth model, this paper employsCobb–Douglas production function incorporating human capital input to estimate potentialGDP growth rate. In sequence, stock of financial capital, human capital in China between1978and2011are calculated, and total factor productivity (TFP) is estimated usingstate-space model, Then, after all corresponding calculation results are imported intoproduction function, we get the potential GDP growth rate. The estimation result shows thatthe average potential GDP growth rate of China is8.2%during1979~2011. Specifically, it is7.9%,8.7%, and8.2%during1979~1990,1991~2000,2001~2011period respectively.Regarding the trend of potential GDP growth rate on year-on-year base, it has declinedgradually since2008, which is confirmed by the results estimated employing HP filterapproach.In the meantime, this paper analyses the trend of the movement of specific productionfactors evolved in potential GDP growth estimation. The research finds that on financialcapital aspect, the growth rate of capital stock falls to17.07%in2011, after reaching a peakof21.25%in2009. While the efficiency of capital investment is declining, the incrementalcapital-output ratio (ICOR) is roughly on upward trend with an average rate of6.97per yearduring2009~2011. On human capital aspect, the proportion of working-age population in2012decreased by0.1percent compared with that in2011. This first time decline ofproportion of working-age population, joint with first time rise of dependency coefficient indicates that labor supply and demographic dividend of China is gradually decreasing infuture. On TFP aspect, the TFP growth rate in China is gradually decreasing since1979. Inthe future, it would be more difficult to achieve fast TFP grow rate as suggested by increasingconstraints put by environment and limited stocks of resources, the slow advancement ofscience and technology in mainland China, as well as by stumbling reform in politicaldomain.In conclusion, based on above findings, this paper argues that currently China’s potentialeconomic growth rate is coming across a turning point, which would leads it to a long-termdownward track with less than8%of growth rate from2012to2020, roughly around6.6%~7.8%.