The Output Gap and Potential Output in Namibia

Emmanuel Ziramba Emmanuel Ziramba,Jaungura Kaune Jaungura Kaune,Johanna Mumangeni Johanna Mumangeni,Charlotte Tjeriko Charlotte Tjeriko,Bernie Zaaruka Bernie Zaaruka

doi:10.22610/jebs.v11i5(j).2967

Emmanuel Ziramba Emmanuel Ziramba, Jaungura Kaune Jaungura Kaune + Show 3 more

Open Access

https://doi.org/10.22610/jebs.v11i5(j).2967

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Abstract

The study analysed the behaviour of potential output and output gap for the Namibian economyusing annual data from 1980 to 2016. The study employed the Hodrick-Prescott (HP) filter method and theproduction function approaches to estimate potential output before calculating the output gap. The resultssuggest an annual average growth rate of 3.6 percent in potential output. However, it has been noted that theaverage annual growth rate in potential output has been shifting during the period under review. In fact, theresults suggest an annual average growth rate of 1.6 percent between 1980 and 1985 and an increase to 2.5percent per year for the period 1986 to 1990. Potential output estimates obtained using the productionfunction approach was smooth and stable throughout the study period. The potential output estimatesobtained through the two methods follow the same cyclical movements. The output gap estimates from thetwo techniques are not different from each other, and they appear to move together.

Highlights

An output gap is identified by the difference between an economy’s actual output level and the level of production that would ensure full employment of its resources
Full employment is normally defined as a situation where there is no cyclical unemployment.The main purpose of this study was to estimate potential output and output gap for Namibia
The results suggest an annual average growth rate of 3.6 percent for the potential output

Summary

Introduction

An output gap is identified by the difference between an economy’s actual output level and the level of production that would ensure full employment of its resources. An estimate of potential output at any point in time indicates the economy’s capacity to supply goods and services. A positive output gap will result in inflation due to demand pressures in the goods markets. A strong positive correlation between the growth rate of potential and actual output will not put pressure on prices. According to Jovicic (2017) potential output and output gap estimates provide indications of the business cycle position of an economy. Such information is useful to central banks in their economic analysis. When demand exceeds potential output, the central bank will implement a contractionary policy to mitigate the inflation pressures. The country’s economy has grown by 3.5 percent per annum for the last four decades, whilst the broad unemployment rate has grown to 34.0 percent in 2016 based on the Namibia Labour Force Survey (2016)

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