Assignment 7

Fatima Farhat
19U00165
Group 2
Econ growth

The article "Combining the Beveridge and the Phillips Curve into an Integrative Model: The
Modified Output Gap" explains a modified version of the output gap that incorporates
information from both the Beveridge Curve and the Phillips Curve.
A production function that takes inputs like labor and capital into account is used to estimate
potential GDP, which is used to compute the traditional output gap. The output gap, which shows
the discrepancy between actual economic activity and what the economy is capable of producing
at full capacity, is an important economic measure.

To comprehend the connection between inflation and unemployment, the author contends that
the conventional output gap is insufficient. He suggests a modified output gap that accounts for
the Beveridge Curve's description of the relationship between job openings and unemployment
as well as the Phillips Curve's description of the relationship between inflation and
unemployment.

The Beveridge Curve explains how unemployment and job openings are related. It implies that
unemployment should be low while job openings are many and vice versa. On the other hand,
the Phillips Curve shows that there is a trade-off between unemployment and inflation.
Specifically, when unemployment is low, inflation tends to be high, and vice versa.
To incorporate information from both the Beveridge Curve and the Phillips Curve into the output
gap, author suggests the following modified output gap equation:
Output Gap = Actual GDP - Potential GDP'
where Potential GDP' is a modified measure of potential GDP that takes into account both the
natural rate of unemployment and the relationship between job vacancies and unemployment.
The equation for Potential GDP' is as follows:
Potential GDP' = A*(1-u)^k * V
where u is the unemployment rate, V is the level of job vacancies, and A and k are parameters
that reflect the productivity of labor and the relationship between job vacancies and
unemployment, respectively.

The potential GDP equation accounts for the notion that employment opportunities and
economic activity should be at their peak when unemployment is at its natural rate. The level of
economic activity will depart from its potential level if unemployment rises over its natural rate.
The values of the parameters A and k show how changes in the number of open positions impact
the level of economic activity.

Dr. Sell contends that the modified output gap, which takes into account data from both the
Beveridge Curve and the Phillips Curve, offers a more complex and accurate understanding of
the relationship between inflation and unemployment. He asserts that policymakers and
economists may find this modified production gap to be a useful tool in their analysis of the
economy