Harrod–Domar growth model

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A growth model, named after its originators, which considers the consequences of fixed capital–labour ratios and saving propensities. In this model, the labour force, measured in efficiency units to allow for technical progress, grows at an exogenously fixed natural growth rate, n. There is a fixed capital–output ratio, v, and a fixed propensity to save, s. If national income is Y, savings are sY. The desired capital stock is vY, and if this grows at a constant proportional rate g, desired investment is gvY. Ex ante savings and investment are equal only if sY = gvY, or g = s/v. The only growth rate which makes this possible is w = s/v, the warranted growth rate. If w = n, growth is possible with a constant percentage of the labour force employed. If w < n, that is, the warranted growth rate is less than the natural rate, equilibrium growth of national income involves steadily increasing unemployment. If w > n, equilibrium growth becomes impossible once full employment is reached, and the resulting slowdown in growth produces a slump. The Harrod–Domar growth model is a special case of the Solow growth model, in which v adjusts to accommodate any combination of s and n.

Subjects: Economics.

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