Estimating potential output and output gap is crucial for making economic decisions in Nepal. A positive output gap means demand is higher than what the economy can produce, leading to inflation. A negative output gap indicates recession and high unemployment. In Nepal, potential output grew by 4.3% from 1976 to 2017, but growth slowed after 2000 due to lower productivity. Output gaps in Nepal are mainly influenced by supply shocks like weather and disasters, rather than demand changes.