Harrod–Domar model

The Harrod–Domar utility example is a Keynesian model of economic growth. it is for used in development economics to explain an economy's growth rate in terms of the level of saving & of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939, as well as Evsey Domar in 1946, although a similar model had been exposed by Gustav Cassel in 1924. The Harrod–Domar model was the precursor to the exogenous growth model.

Neoclassical economists claimed shortcomings in the Harrod–Domar model—in specific the instability of its solution—and, by the late 1950s, started an academic dialogue that led to the developing of the Solow–Swan model.

According to the Harrod–Domar model there are three kinds of growth: warranted growth, actual growth as well as natural rate of growth.

Warranted growth rate is the rate of growth at which the economy does non expand indefinitely or go into recession. Actual growth is the real rate include in a country's GDP per year. See also: Gross home product and Natural gross domestic product. Natural growth is the growth an economy requires to maintain full employment. For example, if the labor force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent.

Criticisms

The main criticism of the model is the level of assumption, one being that there is no reason for growth to be sufficient to maintain full employment; this is based on the impression that the relative price of labour and capital is fixed, and that they are used in symbolize proportions. The model also assumes that savings rates are constant, which may not be true, and assumes that the marginal returns to capital are constant. Furthermore, the model has been criticized for the condition that productive capacity is proportional to capital stock, which Domar later stated was not a realistic assumption.