The Harrod-Domar model is a macroeconomic model of economic growth. It was developed independently by Roy Harrod in 1939 and Evsey Domar in 1946. The model is based on the idea that economic growth is determined by the level of InvestmentInvestment and the SavingsSavings rate. The model has been criticized for being too simplistic and for not taking into account other factors that affect economic growth, such as Technological Progress and government policy.
The following are the subtopics of the Harrod-Domar model:
- Assumptions
- Equations
- Solution
- Criticisms
- Applications
- Extensions
The Harrod-Domar model is a macroeconomic model of economic growth. It was developed independently by Roy Harrod in 1939 and Evsey Domar in 1946. The model is based on the idea that economic growth is determined by the level of investment and the savings rate. The model has been criticized for being too simplistic and for not taking into account other factors that affect economic growth, such as technological progress and government policy.
Assumptions
The Harrod-Domar model makes the following assumptions:
- The economy is closed, meaning there is no trade with other countries.
- The capital stock is the only factor of production.
- There is no technological progress.
- The savings rate is constant.
- The capital-output ratio is constant.
Equations
The Harrod-Domar model can be expressed in the following equations:
- $Y = CC + I$
- $C = aY$
- $I = sY$
- $Y = K/v$
- $K = I/v$
where:
- $Y$ is output
- $C$ is consumption
- $I$ is investment
- $a$ is the marginal propensity to consume
- $s$ is the savings rate
- $v$ is the capital-output ratio
Solution
The Harrod-Domar model can be solved to find the equilibrium growth rate, which is given by the following equation:
- $g = s/v$
The equilibrium growth rate is the rate of growth at which the economy will grow in the long run. If the actual growth rate is less than the equilibrium growth rate, then the economy will experience a shortage of capital and the capital stock will grow. If the actual growth rate is greater than the equilibrium growth rate, then the economy will experience a surplus of capital and the capital stock will shrink.
Criticisms
The Harrod-Domar model has been criticized for being too simplistic and for not taking into account other factors that affect economic growth, such as technological progress and government policy. The model has also been criticized for being unable to explain why some countries grow faster than others.
Applications
The Harrod-Domar model has been used to analyze economic growth in a number of countries. The model has also been used to develop policies to promote economic growth.
Extensions
The Harrod-Domar model has been extended in a number of ways. One extension is the Solow-Swan model, which takes into account technological progress. Another extension is the endogenous growth model, which takes into account government policy and other factors that affect economic growth.
Assumptions
The Harrod-Domar model is based on the following assumptions:
- The economy is closed, meaning there is no trade with other countries.
- The capital stock is the only factor of production.
- There is no technological progress.
- The savings rate is constant.
- The capital-output ratio is constant.
Equations
The Harrod-Domar model can be expressed in the following equations:
$Y = C + I$
$I = sY$
$Y = K/v$
where:
- $Y$ is the level of output
- $C$ is the level of consumption
- $I$ is the level of investment
- $s$ is the savings rate
- $K$ is the capital stock
- $v$ is the capital-output ratio
Solution
The Harrod-Domar model can be solved to find the equilibrium level of output, $Y^*$, as follows:
$Y^* = s/v$
The equilibrium level of output is determined by the savings rate and the capital-output ratio.
Criticisms
The Harrod-Domar model has been criticized for being too simplistic and for not taking into account other factors that affect economic growth, such as technological progress and government policy.
Applications
The Harrod-Domar model has been used to analyze economic growth in a number of countries. For example, it has been used to explain the economic growth of Japan in the post-war period.
Extensions
The Harrod-Domar model has been extended in a number of ways. For example, it has been extended to include technological progress and government policy.
Question 1
The Harrod-Domar model is a macroeconomic model of economic growth. It was developed independently by Roy Harrod in 1939 and Evsey Domar in 1946. The model is based on the idea that economic growth is determined by the level of investment and the savings rate.
Which of the following is not an assumption of the Harrod-Domar model?
(A) The capital stock is constant.
(B) The savings rate is constant.
(C) The output-capital ratio is constant.
(D) The population is constant.
Answer
(A) The capital stock is constant.
The Harrod-Domar model assumes that the capital stock is growing at a constant rate. This is because the model assumes that the savings rate is constant, and that the output-capital ratio is constant. If the capital stock were constant, then the savings rate would have to be zero, and the output-capital ratio would have to be infinite.
Question 2
The Harrod-Domar model is based on the following equations:
$Y = c + I$
$I = sY$
$Y = vK$
where $Y$ is output, $c$ is consumption, $I$ is investment, $s$ is the savings rate, $v$ is the output-capital ratio, and $K$ is the capital stock.
Which of the following is the solution to the Harrod-Domar model?
(A) $Y = sY$
(B) $I = sY$
(C) $Y = vK$
(D) $K = sY/v$
Answer
(D) $K = sY/v$
The solution to the Harrod-Domar model is $K = sY/v$. This equation shows that the capital stock is equal to the savings rate times the output-capital ratio.
Question 3
The Harrod-Domar model has been criticized for being too simplistic and for not taking into account other factors that affect economic growth, such as technological progress and government policy.
Which of the following is an example of a factor that the Harrod-Domar model does not take into account?
(A) Technological progress
(B) Government policy
(C) The savings rate
(D) The output-capital ratio
Answer
(A) Technological progress
The Harrod-Domar model does not take into account technological progress. Technological progress is the increase in the productivity of labor and capital. It is a major factor in economic growth.
Question 4
The Harrod-Domar model has been applied to a variety of countries, including the United States, Japan, and China.
Which of the following is an example of how the Harrod-Domar model has been applied to the United States?
(A) The model has been used to explain the post-war economic boom in the United States.
(B) The model has been used to explain the slowdown in economic growth in the United States in the 1970s and 1980s.
(C) The model has been used to explain the economic growth of the United States in the 1990s and 2000s.
(D) All of the above.
Answer
(D) All of the above.
The Harrod-Domar model has been used to explain the post-war economic boom in the United States, the slowdown in economic growth in the United States in the 1970s and 1980s, and the economic growth of the United States in the 1990s and 2000s.
Question 5
The Harrod-Domar model has been extended in a number of ways, including the introduction of endogenous technological progress and the introduction of government policy.
Which of the following is an example of an extension of the Harrod-Domar model that introduces endogenous technological progress?
(A) The Solow model
(B) The Romer model
(C) The endogenous growth model
(D) All of the above.
Answer
(D) All of the above.
The Solow model, the Romer model, and the endogenous growth model are all extensions of the Harrod-Domar model that introduce endogenous technological progress.