Potential GDP Estimation and Output Gaps: Insights from Cross-Country Studies and Applications to Developing Economies

Abstract

Despite being essential instruments in macroeconomic research, potential GDP and the production gap are
nevertheless difficult to estimate because of methodological decisions, structural variations, and data constraints.
Evidence from cross-national studies examining mature, resource-dependent, and transition economies—such as those
in the European Union, Japan, Saudi Arabia, Croatia, and Moldova—is reviewed in this study. It analyzes the advantages
and disadvantages of the three primary methods—statistical filters, production functions, and multivariate frameworks. The
findings indicate that demographic changes are important for advanced economies, sectoral disaggregation is essential
for resource economies, and catastrophes like the global financial crisis and the COVID-19 pandemic permanently lower
potential production. Notwithstanding variations in methodology, the production gap is still a crucial tool for monetary and
fiscal policy and reliably forecasts inflation. In order to provide credible economic management, the article suggests that
potential GDP should be seen as a dynamic standard that requires ongoing methodological improvement and contextspecific
application