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This would lead to deficiency of capital, which would, in turn, adversely affect the volume of goods to be produced. Balancing of the two sides provides the solution for steady growth. Harrod-Domar Economic Growth Model: Warranted rate of growth is thus equilibrium rate of growth in the sense that producers, if they achieve it, will be induced to maintain it.

LDCs do not have sufficiently high incomes to enable sufficient rates of saving; therefore, accumulation of physical-capital stock through investment is low. Criticisms of Harrod Domar Model Developing countries find it difficult to increase saving. According to them, to maintain full employment equilibrium, demand total spending generated by investment must be sufficient to be the additional output caused by this investment. In Keynesian terminology, there would be deficiency of demand and consequently the economy would face the problem of deflation.

A simplified model of Harrod-Domar: Your email address will not be published. It was thus argued by him that even if domestic savings were sufficient for making the necessary payments for the domestically produced raw materials and other inputs but to procure foreign raw materials, capital goods and intermediate products a country needs foreign exchange which can be available if a country is able to either expand exports or obtain foreign aid, credit or foreign investment.

It is also known as Full-capacity growth rate.

## Harrod-Domar Model of Economic Growth | Economics

It is greatly helpful to express the above growth equation in terms of rates of growth of income and capital. Thus, depreciation rates are not included in these variables. Commenting on these models, Prof. We can explain the model in geometrical terms with the help of Fig. The marginal product of capital is constant; the production function exhibits constant returns to scale. Domar viewed growth from the demand as well as the supply side. These deviations cannot go on working indefinitely.

This refers to the productivity of investment, e.

Statements consisting only of original research should be removed. The proportion of investment to income being fixed, an increase in income would mean that in the next period both income and investment must be higher. Business cycles are viewed as deviations from the path of steady growth. From the growth equation 5 above, it is clear that, given the output-capital ratio, rgowth of growth of output depends upon the rate of investment; the greater the rate of investment, the greater the rate of growth of output or income.

Comparing the second and the third relations about the warranted growth rate and the natural growth rate which have been given above, we may conclude that G n may or may econommic be equal to G w. For example, who benefits from growth? Harrod assumed there was no reason for the actual growth to equal natural growth and that an economy had no tendency to full employment.

This is the state of secular stagnation.

### Harrodâ€“Domar model - Wikipedia

Introduction to Harrod-Domar Growth Model 2. These assumptions thus generate equal growth rates between the two variables. The law of diminishing returns would suggest that as investment increases the productivity of capital will diminish and the capital to output ratio will therefore rise. Investment is induced by output growth along with entrepreneurial confidence.

The transfer of capital to developing economies should enable higher growth, which in turn will lead to higher savings and growth will become more self-sustaining. This is the situation in which there would be secular stagnation. The increased capacity arising from investment can result in greater output or greater unemployment depending on the behaviour of income.

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