This paper aims to examine the factors of growth of a developing country such as China. Because of the existence of domestic distortions, the traditional approach of using the growth of gross domestic product (GDP) to represent economic growth of the economy is not appropriate. This paper seeks to estimate how a change in resource misallocation may affect the measured growth rate of GDP.
Using provincial data for four southern provinces of China for the years from 2000 to 2004, the paper considers two hypothetical cases, one in which labor allocation is fixed, and one in which labor allocation is assumed to be optimal both before and after growth. The growth factors for GDP in these two hypothetical cases are compared with the observed growth factors.
This paper argues that the growth rate of GDP has overestimated the growth rate of the economy in this period. It can thus be said that the degree of the distortion caused labor misallocation decreases over time in this period.
Because of limitations of data, this study treats each province as one sector, producing one homogeneous product, although the same methodology can be applied to more than one sector in each province. Furthermore, the present work assumes constant external prices.
The present study shows the importance of removing distortions in the economy, and how an improvement in the efficiency may raise the GDP of the economy.
The methodology and approach introduced here are quite new and are useful in assessing the implications of distortions on production and welfare.
