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.
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
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