HARROD DOMAR GROWTH MODELS

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HARROD DOMAR GROWTH MODELS

The classical economists laid stress on savings  and accumulation of capital and the  role of investment  and technology in economic growth. They thus concentrated  on  the supply side of the problem of economic  growth. Tile demand for capital was   taken for  granted. But this is true of the mature economies in  which investment   the demand for capital tends to  lose its momentum. The problem of demand for   capital or investment received Keynes’ attention. In his  ‘General T. Cory Keynes   analysed the aggregate problem  like the levels of output income and employment,  savings investment  etc. But Keynes’ was a short run  analysis and excepting his   emphasis on savings and role of  expectations it was mainly static  whereas analysis  of economic growth has to be dynamic since it Sir Roy  Harrods. 1900-1978.  involves changes of some fundamental variables in the economy. But Keynesian   analysis opened the way for dynamic analysis, i.e., analysis of the problems of   worth. Tile tools  of economic analysis forged by him. vi: .. multiplier  and the  accelerator (introduced by J.M. Clark) have  been used by modern economists in  worth analysis.  They have used his analysis of saving as a demand reducing factor  and investment as demand generating  factor to examine the role of these factors in  economic  growth. Thus. Keynesian analysis and concepts have  furnished the basis  Our modern models of economic  growth. The foundations PI’ modern growth  analysis  lie in the ideas and concepts contained in Keynes’s book. ‘General Theory of   employment. Interest and lone  How Keynesian Economics has been used in the analysis of economic growth will he clear from the  growth models given by  ardor. Tornado and others. Harrods and Delmar 7 anally disc the dynamic nature of  invest fitment and demand and showed how vacations in capital and in demand   are  responsible for  stability  i’ll economic growth.

We have studied above the main determinants  of economic growth viz., natural   resources, rate of savings and capital, formation, technological progress population   growth, etc. These determinants  of economic growth influence the rate of growth by  influencing two important factors: (a) The Rate of  Investment and (b) Capital-  output Ratio. Hence!, the  rate of economic growth in a country, i.e., growth of O.N.P.   depends on the rate of investment and capital output  ratio.

HARROD DOMAR GROWTH MODELS

HARROD DOMAR GROWTH MODELS

While discussing the determinants of economic growth, we mentioned the important role of the concept of capital-output ratio. If each unit  f a given capital stock yields larger output tlie rate of economic growth will be higher. For instance if a machine worth Rs. 5,000. produces  output worth Rs. 1,000 the capri

Rs.5.000  all output ratio is Rs.l,OOO  5 and if capital worth Rs. 10,000 produces goods worth Rs. 2.500 the cape Rs.IO.000 tale output  ratio is Rs.2,500 or 4, and so on. Thus  capital-output ratio is simply the inverse of the annual return on (productivity of) capital. If the   capital-output  ratio is 5. the return is 20 per cent and if it is 4

6. Amid R.F Towards Dynamic Economics.  7. Lorna E.D Essays in the Theory of Economic 8. Stonier and Hague. A  textbook of Economic  Theory 1971. pp. 593-599.

the return is 25 per cent. The capital-output ratio  is represented by the symbol v. ‘v represents the actual marginal capital-output ratio.   hat  s it shows  the extra amount of capital invested divided by the

above is the inverse of the marginal capital-output ratio.  It shows the marginal increment of output (income) produced by a marginal increment of nation’s capital

HARROD DOMAR GROWTH MODELS

HARROD DOMAR GROWTH MODELS

This equation (3) means that increase in output during  any period is equal to extra units of capital invested multiplied by the output   obtained from each unit of capital invested.

Warranted Growth Rate. Equation (3) only tells  us what has happened output actually obtained from a certain amount of capital   invested. But it docs  not say whether this growth is satisfactory or not from the   point of view of a steady growth of the economy  or from   he point of view of the entrepreneur. The fundamental  equation for growth rate which the entrepreneurs  would find just satisfactory from   he point of profitability can be put down in the following form.

Prof. Harrods has called Ow a. the warranted rate of  growth. The entrepreneurs would regard this rate of growth as just satisfactory and w  ls like it to be repeated. That is why  IS written on the right side of the equation at the foot of  This is the overall rate  of growth and   to the rate of growth relating to certain sectors of the economy which may be rising in some  and declining in otbe  We may repeat that   equation (3) shows what has  actually. i.c.. the growth rate actually realised but 1I0t the rate which the entrepreneurs as a whole would  consider JUSt satisfactory and worthwhile- repeating.  This latter rate is shown in equation (4). II is the warranted  rate of growth (G,,)  which   is considered just  satisfactory and the entrepreneurs would like it to be  repeated. The growth fate shown in equation (3) depends 011   circumstances varying with economic  fluctuations-booms and slumps. But the growth rate

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