kelvin mutembei - READING MATERIAL Economic Growth...

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READING MATERIAL Economic Growth - Harrod-Domar Model The Harrod-Domar growth model stresses the importance of savings and investment as key determinants of growth The Harrod Domar Growth model is a growth model and not a growth strategy ! A model helps to explain how growth has occurred and how it may occur again in the future. Growth strategies are the things a government might introduce to replicate the outcome suggested by the model. Basically, the model suggests that the economy's rate of growth depends on: The level of national saving (S) The productivity of capital investment (this is known as the capital-output ratio) The Capital-Output Ratio (COR) For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists. A 3 to 1 capital-output ratio indicates that only £30 of capital is required to produce each £10 of output annually. If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital.
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