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Aggregate Investment In The People'S Republic Of China: A Comment

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Jesus Felipe ()
Abstract

This comment raises three main issues about He and Qin's (2004)attempt at modeling investment in the PRC. The first is this author's skepticism about the general applicability of the neoclassical model of investment to the PRC. Second, that their model for business investment, based on the neoclassical theory of investment, can be viewed as an approximation to an accounting identity derived by manipulating two other identities, namely, that of the capital share in output, and that of the motion of the capital stock. It is shown that the difference between He and Qin's equation and the identity is simply yhat they use the rental price of capital, while the identity relies on the profit rate. At best, all their analysis would indicate is that rental price of capital and profit rate are different. It is also argued that the empirical results are not clearly related to the supposed theoretical model. Based on this, the conclusion is that the policy implications of He and Qin's alleged model are somewhat dubious. Third, He and Qin's equation for government investment introduces the deviations of output from the long-run trend as an explanatory variable, estimated using an aggregate production function. The problems underlying this latter concept make the estimation of the output trend using this method a questionable exercise. Also, the empirical results suffer from serious problems of interpretation.

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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2005-17.

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Length: 21 pages
Date of creation: Aug 2005
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Handle: RePEc:acb:camaaa:2005-17

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    Other versions:
  2. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1986-1), pages 111-164. [Downloadable!]
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  5. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc. [Downloadable!]
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  10. Alwyn Young, 2000. "Gold into Base Metals: Productivity Growth in the People's Republic of China during the Reform Period," NBER Working Papers 7856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May. [Downloadable!] (restricted)
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  12. Song, Haiyan & Liu, Zinan & Jiang, Ping, 2001. "Analysing the determinants of China's aggregate investment in the reform period," China Economic Review, Elsevier, vol. 12(2-3), pages 227-242. [Downloadable!] (restricted)
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