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Harrod-Domar Model

for IB Economics

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Harrod-Domar Model

  1. 1. HARROD-DOMAR MODEL Megan Kedzlie
  2. 2. MODEL DEVELOPMENT: SIR ROY HARROD EVSEY DOMAR • British economist • Russian/American • Biographer of John economist • Developed Domar Model in 1946 at Harvard • Became professor at MIT and John Hopkins Maynard Keynes • Wrote first textbook International Economics • Developed the Harrod Model in 1939 at Christ Church
  3. 3. THE MODEL • The Harrod-Domar model theorizes that the rate of economic growth in a country is defined by the level of savings and the capital output ratio. SIMPLY: SAVINGS (S) ------------------RATE OF = CAPITAL GROWTH (Y) OUTPUT (k) RATIO capital output ratio: the amount of capital needed to produce one unit of output .
  4. 4. SYSTEM: increase d savings increase d revenue increased production increased investment increase d capital If there is a lot of savings in a country, it will generate capital for the firms tomorrow and invest. This capital will allow for economic growth, through the increased production and provision of goods and services.
  5. 5. CRITICISMS • Assumptions: • Growth is all that is needed to maintain complete employment • Price of labor and capital is fixed and used equally • Growth vs. Development • This model claims that economic growth is the same as economic develpoment, whereas most would suggest that growth is only a subset to the economic development of a nation • Policy of Savings • The model makes it seem that it’s easy to implement legislation that would increase the amount that citizens saved, whereas in reality its hard to define and push people to save always.
  6. 6. SOLOW-SWAN MODEL With the many issues that the model has concerning its accuracy, the Harrod-Domar Model was developed into the Solow-Swan model, which accounts also for the different intensities of capital invested which was what could bring the nation’s economy to a steady state.

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