This study examines the matter of trends (level and slope), cycle and irregular components in the Gross Domestic Product (GDP) and Household Consumption Expenditure (HCE) of two SAARC (South Asian Association for Regional Cooperation) countries: Nepal and Pakistan. SAARC countries produce GDP (PPP) US$ 9.9 trillion and GDP (Nominal) US$ 2.9 trillion and constitute 9.12% of global economy as of 2015. The mentioned two countries from this region are selected due to their importance in the SAARC region and their challenges during last few decades i.e. Political crisis and natural disasters. In this study the multivariate unobserved components model is used to decompose the GDP and HCE and examine the relationships between these two variables of Nepal and Pakistan. The time period of this study is 1970-2014 and Kushnirs statistical data is employed. The maximum likelihood smoother is employed in the trend plus stochastic cycle methodology of Koopman et al. (2009) to estimate the model. It is found here that there have no deficiencies in the diagnostics of normality, auxiliary, prediction, and forecast. And residual diagnostics also present that it is nicely fitted with this model. Empirical results clearly show that there have strong correlations between the GDP and HCE in irregular components in both the countries of Nepal and Pakistan. Finally, in both slope and cycle, the correlations between GDP and HCE of Nepal and Pakistan are found perfectly positive in the short and long run.

Author Name: Md. Saiful Islam & Dr. Shaikh Mostak Ahammad

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Keywords: GDP, Household Consumption Expenditure, UC Model, SAARC, Economy

ISSN: 2520-4750

EISSN: 2521-3040

EOI/DOI: 10.5281/zenodo.439694

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