Harrod- domarModel

Growth and development.Topic- 3

Steady growth eqm, knife edge eqm,Razar edge

eqm

H-D model is based on keynesian saving-investment

analysis.

Acc. To H-D model capital is the crucial factor of economic

growth,.

H-D model concentrate on the possibility of steady growth

through adjustment of supply and demand of capital.

Assumptions-

Full employment of income is already exists.

No govt intervention.

3.This model based on closed economy.

4.APS and MPS are equal to each other.

5.APS,MPS,and capital coefficient(capital output ratio)

are constant.

6.Law of constant return operate.(because of fix capital

output ratio.

1.Harrod model

Harrods model raise three issues-

1.How can steady growth be achieved with fixed capital-

output ratio.

2.How can steady growth can be maintained?

3.How do the natural factors put a ceiling n the growth

rate the economy.

To solve these issues Harrod adopted three concepts-

1.Actual growth rate.

2.Warranted growth rate.

3.Natural growth rate.

1.Actual growth rate.

Actual growth rate is determined by actual rate of savings

and investment in the economy.

G is defined as the ratio of change in income to the total

income.

G=ΔY

Y

G is determined by saving-income ratio and capital-output

ratio.(both factors are fixed)

I=S This is called dynamic equilibrium.

2.Warranted growth rate.

It is growth rate of economy when it is working at full

capacity.

Denoted as Gw

Gw is also called full capacity growth rate

Gw is determined by capital output ratio and saving-

income ratio.

At steady eqm of Gw full utilized its capacity.

In Gw the demand for businessmen is high enough.

WGR eqm is Gw Cr=S

Where- Cr shows the requred capital for maintain

warranted growth rate.

S is saving-income ratio.

According to Harrod the economy can achive steady

growth when --

G=Gw and C=Cr

Instability of growth

If G>Gw

Then C<Cr

If G<Gw

Then C>Cr

Growth rate of income is

more than growth rate of

output.

Demand is increases (due to

rise in income) more than the

output.

-It would create inflation.

Growth rate of income is less

than growth rate of output.

Demand is decreases (due to

fall in income) more than the

output.

-It would create deflation.

Steady growth implies a balance bw G and Gw.

3.Natural growth rate.

It is denoted as Gn

Gn is determined by natural conditions such as labour

force, natural resources ,capital equipement and technical

knowledge.

Gn create a limit beyond which expansion of output is not

possible this limit is called- full employment ceiling.

Gn is maximum growth which an economy can achieve

with its available natural resources.

It is also called welfare optimum and full employment rate

of growth.

Knife edge equilibruim

G=Gw=Gn

Interaction of G,Gw and Gn

When Gn>Gw

Employment increases to achieve full employment.

Gro

wth

ra

te

time

Gn

Gw

G

It implies –there will be cumulative boom and full

employment

Such situation will create inflationary trend.

In this situation

Gw is also less

than G. and

C<Cr

When Gw>Gn

Gro

wth

ra

te

time

Gn

Gw

G

In this situation

Gw is also more

than G. and

C<Cr

There is excess of capital goods and shortage of labour..

Capital becomes idle and there is excess capacity.

This will decrease output ,employment and income.

In such sitution economy will face chronic depression.

1.Domar model

Domar growth model was developed in 1946.

He discuss two roles of investment.

1.Investment generate income.

2.Investment increase productive capacity.

Keynes.

classical

Domar used some equations from these symbols-

Yd= level of NNI.

Ys= level of productive capacity.

α = MPS

K= real capital.

I= net investment.

σ= productive capacity.

Supply side Demand side

Ys= σ K. I/α

Equilibrium= I/α= σ K

I= α σ K Condition of steady growth.

Razor edge equilibrium

It is the situation when economy maintain the balance

bw the -

ΔY

Y= σ α

Path of disequilibruim

ΔY

Y> σ α

ΔY

Y< σ α

Y will increase, Purchasing power

also increases, and production will

be decrease it will lead to inflation.

Y will decrease, Purchasing

power also decreases, and

production will be increase it

will lead to deflation(depression)

Junking- it means untimely loss of capital value due

to the unprofitable operation of capital.

Utilization ratio- employment depend upon the

utilization ratio.

It is expressed as the ration bw actual output and

productive capacity.

Both past and present investment can generate

productive capacity .

If junking is zero then investment increases at the

same rate as output.

Numerical example of Domar model-

Suppose the productivity of capital (α) is 25% and the

MPS is 12% then find out the growth rate of

investment.

100

25*

12

100=

3

100Or 3%

Some imp. points

Harrod technical progress is labour augmenting or

neutral.

G is –growth rate of income

Gw is – growth rate of output.

Inherent feature of H-D model is knife-edge

equilibuim.(G=Gw=Gn)

H-D model is also called as classical Keynesian model.

H-D model is applicable in advance country where

capital Is abundant.

H-D model used dynamic aliments.

Acc to H-D model prime source of capital accumulation is

capital itself.

In H-D model growth rate is determined by saving-

income ratio and productivity of capital.

Lewis &

Fie and ranismodel

Growth and development.Topic- 4

Utilization of surplus manpower-1 and utilization of

surplus manpower-2