HARROD DOMAR MODEL -- econ research.docx - HARROD DOMAR...

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HARROD- DOMAR MODELHarrod -Domar Model -it is used in development economics to explain an economy’s growth rate in terms of the level of saving and productivity of capital Also can be referred to as the AK model where A is a constant and K is capital stock. The AK model describes the mechanism by which more investment leads to more growth. Harrod- Domar Growth Model The economy’s rate of growth depends on: 1.The Level of national saving (S) 2.Productivity of capital investment (this is known as the capital – output ratio or COR ) oIf the COR is low country can produce more with little capital but if it high, more capital s required for production and value of output is less. oWhen the quality capital resources are high, then the capital output ratio will be lower. The Harrod- Domar Model suggests that economic growth rates depend on two things: oLevel of Savings(higher savings enable higher investment )oCapital Output Ratio. A lower capital output ratio means investment is more efficient and the growth rate will be higher A simplified model of Harrod-Domar : Harrod Domar FormulaoRate of growth of GDP =Savings Ratio / capital output ratio oRate of growth in an economy can be increased in one of two ways. 1.Increased level of savings in the economy (i.e gross national savings as a % of GDP ) 2.Reducing the capital output ratio ( i.e. increasing the quality / productivity of capital inputs)Harrod-Domar in more detailsLevel of Savings (s) = Average propensity to save (APS) – which s the ratio of national savings

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