Estimating Potential Output and Output Gap for Pakistan

Abstract

The objective of this paper is to calculate the output gap in Pakistan’s economy through three main estimation techniques, namely time trend, production function and HP Filter method. We use these techniques to initially calculate potential output and then the output gap in an economy. The results show that even though the values found out are not identical but they have a high degree of correlation amongst them. The data series we have taken is from 1972 to 2010 and the benchmark output gap show that there have been periods of excess supply and excess demand throughout the time period we have taken. In case of Pakistan, the economy has been operating below potential. The study also attempts to identify major factors that have an effect on the output gap in case of Pakistan