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The output gap is one main ingredient in the calculation of the cyclically-adjusted budget balance of the EU Member States. Since 2002 the European Commission applies the Cobb-Douglas production function approach to obtain the output gap from the short-term deviations of labour and total factor productivity (TFP) from their potential. The cycle in unemployment is considered as an unobserved dynamic factor which is common to a labour cost indicator in a Phillips curve relationship, while the cycle in productivity is shared by capacity utilization. The complement of the unemployment cycle makes up the NAWRU.

GAP implements two bivariate dynamic factor models to decompose unemployment and productivity into equilibrium or potential plus short-term deviations. Interested readers can find an exhaustive description of the EU commonly agreed methodology in Havik, K., K. Mc Morrow, F. Orlandi, C. Planas, R. Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen and V. Vandermeulen (2014), "The production function methodology for calculating potential growth rates and output gaps'', European Economy, Economic Paper, 535.

Download GAP version 5.0, both executable and source code. Further information can be obtained from Alessandro Rossi, or Christophe Planas.