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HARROD

The Harrod-Domar model shows how investment through savings can accelerate economic growth by increasing the capital stock. It assumes that savings lead to investment, investment increases the capital stock, and there is a constant capital-output ratio. However, the model makes unrealistic assumptions about laissez-faire economies and constant savings rates. It also does not consider factors beyond investment and savings that are necessary for development.

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Marga Lera
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51 views1 page

HARROD

The Harrod-Domar model shows how investment through savings can accelerate economic growth by increasing the capital stock. It assumes that savings lead to investment, investment increases the capital stock, and there is a constant capital-output ratio. However, the model makes unrealistic assumptions about laissez-faire economies and constant savings rates. It also does not consider factors beyond investment and savings that are necessary for development.

Uploaded by

Marga Lera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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HARROD-DOMAR MODEL

This model shows how sufficient investment through savings can accelerate growth. Investments generate income
and supplement the productivity of the economy by increasing the capital stock. The Harrod-Domar model is based
on the following assumptions:
 Laissez-faire; where there is no government intervention
 A closed economy; no participation in foreign trade
 Capital goods do not depreciate as they possess a boundless timeline
 Constant marginal propensity to save
 Interest rate remains unchanged, etc.

The model assumes that: 


1. Savings lead to investment 
2. Investment leads to changes in capital stock
3. Constant capital-output ratio
 
The Harrod-Domar model makes use of a Capital-output Ratio (COR). If the COR is low a country can produce more
with little capital but if it is high, more capital is required for production and value of output is less. This can be
denoted in a simple formula of K/Y=COR; where K is the Capital stock and Y is Output because there is a direct
proportional relationship between both variables.
 
There are several criticisms of the assumptions of this model. Let’s start with the assumption of laissez-faire. It is
almost impossible for underdeveloped nations to undertake certain large projects without the help of the
government. As a growing economy, the private sector has limitations to what they are able to contribute for the
growth of its country and this is where the government intervenes.
Also, as much as savings and investments are necessary for development, it is not enough. The savings ratio might
be constant but low and cannot support the amount of productivity the country might want to undertake. There are
other arrangements that have to be put in place to complement its savings and investment.

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