There has been growing concern over potential growth rate in Korea economy, which will decline due to the global financial crisis, just as it was the case after Asian currency crisis. In this study we estimate and project potential GDP growth in Korea in the basis of production function approach and time-series approach.
 

According to the production function approach, the level of real GDP is determined by technological relationship among capital stock, labor, and total factor productivity. The potential level of each production input is replaced by this functional relationship to obtain potential level of real GDP.

Time-series approach is based on the unobserved component model(UC model hereafter) of Stock and Watson(1986). Univariate UC model not only decomposes real GDP into stochastic trend that follows random walk with time-constant or time-varying drift and stationary cyclical component, but also takes the stochastic trend as potential GDP. Bivariate UC model of real GDP and changes in inflation estimates non-accelerating inflation rate of output(NAIRO) as potential GDP, which explicitly takes into account Phillip-curve relationship in the model. Trivariate UC model combines unemployment rate into the bivariate UC model using Okun's law, and estimate non-accelerating inflation rate of unemployment(NAIRU) at the same time.

Estimation results(Table 1) demonstrate that, after the crisis, potential GDP growth rate in Korean economy appears to have declined to mid-three percentage, in the rage of 2.8% and 3.5% depending on which estimated models are applied, the point here, this figure is 0.4~1.0% lower than before the crisis. Projected average potential GDP growth for five-year in the future, based on NABO's mid-term economic outlook for the 2009-2013, is expected to remain below 4%.