105-The_Harrod_Domar_Growth_Model

105-The_Harrod_Domar_Growth_Model - IB Economics...

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IB Economics www.tutor2u.com IB Economics www.tutor2u.com The Harrod Domar Growth Model The Harrod Domar Growth model is a model 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 should be doing to try and replicate the outcome suggested by the model. The model, developed in the late 1930s states that the rate of growth of GDP is determined by the savings ratio (the marginal propensity to save) in the economy and the capital output ratio (the amount that has to be spent on capital to produce £1 worth of national output e.g. if the ratio was 3:1, £3 would have to be spent on capital to produce £1 of output). Rate of Growth of GDP = Savings ratio/Capital output ratio Numerical example : If the savings rate in the economy is 10% and the capital output ratio is 2, then the country would grow at 5% per year. Based on the model therefore the rate of growth in an economy can be increased in one of two ways:
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This note was uploaded on 02/08/2012 for the course FIN FIN4345 taught by Professor Koij during the Spring '10 term at FIU.

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