The Estimation of Quarterly Potential GDP using Industry-level Quarterly Total Factor Productivity Estimates in Korea

Hak K. Pyo ; Keun-Hee Rhee ; Charlie Nam

Hak K. Pyo (corresponding author): professor emeritus, Faculty of Economics, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, Korea hakkpyo@gmail.com
Keun-Hee Rhee: visiting fellow, Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, Korea keunh.rhee@gmail.com
Charlie Nam: Columbia Climate School, Columbia University, New York, NY 10025, USA cn2660@columbia.edu

JEL Classification: D24, O47

Abstract

This study estimates the quarterly potential GDP of Korea from 2012 Q1 to 2023 Q4 by using industry-level total factor productivity (TFP) data. By referring to the EU KLEMS classification and Fernald (2014), this study constructs a quarterly capital stock and TFP database for 17 industries and adjusts their labor and capital inputs with proxy variables, namely, the labor intensity index and the capacity utilization index. This study compares models with and without input adjustments and reveals a post-pandemic decline in labor productivity and a slow capital input recovery. The adjusted model shows significantly high TFP contributions, which highlights the importance of input adjustments for accurate TFP analyses and potential GDP estimates. The GDP gap is negative during the pandemic period. Although the GDP gap became positive in 2023 Q4, the subsequent decline in the quarterly potential GDP growth indicates economic stagnation in Korea.

Keywords:

Total factor productivity, Potential GDP, Capital adjustment, Labor input

Acknowledgments

An early version of this paper was presented at the Research Institute of Economy, Trade and Industry (RIETI) Studying Group Seminar (November 28, 2024). We appreciate the comments from RIETI Kyoji Fukao, Prof. Tsutomu Miyagawa, Prof. Konomi Tonoki, Prof. Keiko Ito, Prof. Hyeog Ug Kwon, and Prof. Young Gak Kim.

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