Theories of Growth

Here with labor and capital both have to grow to

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Unformatted text preview: that all savings goes to investment is false Simplest version of the growth model: Harrod- Domar model They were trying to describe the situation during the Great Depression But looked so pretty and mathematical that people wanted to use it everywhere Very specific type of growth model: Takes 5 equations and fits them to one type of production function Binding constraints here with labor and capital. Both have to grow to increase output. You can’t just have one increase while other is constant Y is a function of a coefficient times K Coefficient is K/Y Binding constraint on function/production is capital If all we’re looking for is to get more machines, then you have to get MORE SAVINGS (according to our previous assumptions) Delta (Y) = delta(K)/v Growth rate (g) = change in output/current output = delta(K)/(Y x v) = (s/v) – d All you need to do is somehow get people to save more. Poor countries thought that they were poor though and there was no way for them to save. Richer countries saw this and said that this is a chance to begin financial aid. People started using this equation to begin to lobby...
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