The Korean Economic Forum
Estimation of Potential GDP in Korea Using the Stochastic Frontier Production Approach
Hak K. Pyo (Seoul National University), Hyunbae Chun (Sogang University) and Keun Hee Rhee (Seoul National University)Year 2024Vol. 17No. 3
Abstract
This study uses a stochastic frontier production model to estimate Korea’s potential GDP. The model estimates time-varying technical inefficiency for each of the 38 industries from 1995 to 2022. After combining the minimum technical inefficiency of each industry with industry-level potential labor and capital, we calculate the industry-level potential GDP and aggregate them to obtain the economy-level potential GDP. The results suggest that actual GDP below potential GDP is primarily due to the industry’s inability to minimize technological inefficiency rather than suboptimal labor and capital inputs. In particular, since 2010, a decline in capital utilization and an increase in technical inefficiency have expanded the GDP gap, causing the actual growth rate to fall about 25% faster than the potential growth rate. The study distinguishes itself from previous research by reflecting changes in technical inefficiency at the industry level, thus capturing the structural characteristics of Korea’s export-driven industrial sector. It suggests that policies enhancing potential growth rates and reducing the recent GDP gap are needed to recover the midto long-term growth rate.