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To forecast how fast the GDP grows in trend in the long run (say, in thirty yrs), one can use the following simple formula:
annual growth rate of GDP(%)=annual growth rate of A times 1/(1-a) for an economy with a steady a,
where A is the total multifactor productivity of an economy and a is the labor share. In the USA, A is about 1% in the last thirty years or so. a is about 0.68. So the annual growth rate of the US economy in trend in the last thirty years is about 3%. In China, A is about 3.8. For a=.68, the chinese economy can grow by 11.4% annually in trend.
This formula can only apply to the growth trend of GDP for an economy. It does not apply to forecasting the short run flunctuation in GDP of an economy.
Anyway, it does show how much potential the chinese economy has. On the other hand, it also shows at some stage the Chinese economy will have to change its trend quite substantially. It is unrealistic the chinese economy can grow by 11.4% forever. The change in trend must start with the change in the trend growth in A. The growth rate in A the last thirty years of the chinese economy came from the gain in reorganization and reallocation of resources due to reform and openning up policy. It is likely that such a gain can last for the near future because of the vast size of the chinese economy. It is a must to have a structural change starting now to make it sustainable.
If you have any instance this formula does not apply, please examine it carefully and post here. |
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