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c=
dY
Y (t + 1) Y (t)
=
dK
K(t) + sY (t) K(t) K(t)
c=
Y (t + 1) Y (t)
sY (t) dK
dY Y (t)
dK
Y (t)) = Y (t + 1) Y (t)
dY
(
)
dK
cY (t) s
= Y (t + 1) Y (t)
dY
c(sY (t)
cs c
Y (t + 1) Y (t)
dK
=
dY
Y (t)
dY
dY dK
Y (t + 1) Y (t)
=
dK
dK dY
Y (t)
d log(Y ) = d log(K)
Mathematical formalism
dY
dK
=
Y = K.
Y
K
Y
I
=s
Let Y represent output, which equals income, and let K K =
K
K
equal the capital stock. S is total saving, s is the savings
rate, and I is investment. stands for the rate of depre- Y = sc
ciation of the capital stock. The HarrodDomar model In summation, the savings rate times the marginal prodmakes the following a priori assumptions:
uct of capital minus the depreciation rate equals the output growth rate. Increasing the savings rate, increasing
Derivation of output growth rate:
1
6 FURTHER READING
the marginal product of capital, or decreasing the depreciation rate will increase the growth rate of output; these
are the means to achieve growth in the HarrodDomar
model.
4 See also
Economic growth
FeldmanMahalanobis model
Signicance
SolowSwan model
5 References
[1] Harrod, Roy F. (1939). An Essay in Dynamic Theory. The Economic Journal 49 (193): 1433. JSTOR
2225181.
[2] Domar, Evsey (1946). Capital Expansion, Rate of
Growth, and Employment. Econometrica 14 (2): 137
147. JSTOR 1905364.
[3] Cassel, Gustav (1967) [1924]. Capital and Income in the
Money Economy. The Theory of Social Economy. New
York: Augustus M. Kelley. pp. 5163.
[4] Hagemann, Harald (2009). Solows 1956 Contribution in the Context of the Harrod-Domar Model.
History of Political Economy 41 (Suppl 1): 6787.
doi:10.1215/00182702-2009-017.
The model concludes that an economy does not naturally nd full employment and stable growth rates.
The main criticism of the model is the level of assumption, one being that there is no reason for growth to be
sucient to maintain full employment; this is based on
the belief that the relative price of labour and capital is
xed, and that they are used in equal proportions. The
model explains economic boom and bust by the assumption that investors are only inuenced by output (known
as the accelerator principle); this is now widely believed
to be false.
In terms of development, critics claim that the model sees
economic growth and development as the same; in reality,
economic growth is only a subset of development. Another criticism is that the model implies poor countries
should borrow to nance investment in capital to trigger
economic growth; however, history has shown that this
often causes repayment problems later.
The endogeneity of savings: Perhaps the most important
parameter in the HarrodDomar model is the rate of savings. Can it be treated as a parameter that can be manipulated easily by policy? That depends on how much
control the policy maker has over the economy. In fact,
there are several reasons to believe that the rate of savings
may itself be inuenced by the overall level of per capita
income in the society, not to mention the distribution of
that income among the population.
6 Further reading
Ackley, Gardner (1961). Economic Growth: The
Problem of Capital Accumulation. Macroeconomic
Theory. New York: Macmillan. pp. 505535.
Brems, Hans (1967). The One-Country Harrod
Domar Model of Growth. Quantitative Economic
Theory: A Synthetic Approach. New York: Wiley.
pp. 426435.
Cochrane, James L.; Gubins, Samuel; Kiker, B. F.
(1974). Economic Growth (I)". Macroeconomics:
Analysis and Policy. Glenview: Scott, Foresman and
Co. pp. 328353. ISBN 0-673-07639-3.
Hardwick, Philip; Khan, Bahadur; Langmead, John
(1982). An Introduction to Modern Economics. London: Longman. pp. 388391. ISBN 0-582-440513.
3
Keiser, Norman F. (1975). An Introduction to
Growth Theory. Macroeconomics (Second ed.).
New York: Random House. pp. 386399. ISBN
0-394-31922-2.
Lindauer, John (1976). Macroeconomics (Third
ed.). New York: Wiley. pp. 325332. ISBN 0471-53572-9.
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