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The Harrod-Domar growth model assumes that output (Y) is determined by the level of capital (K) through a constant relationship (Y=K/v) where v is the capital-output ratio. The growth rate (g) of output is determined by the savings rate (s) and the depreciation rate (d) as g=(s/v)-d. This means that increasing investment through higher savings allows more capital to accumulate, driving output growth. However, the model makes simplifying assumptions and does not account for factors like varying returns to investment or different types of capital.
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Ed6
- 3. Questions?
- 7. How much do you make? Output Does it change over time? Growth Growth Models
- 8. Innovation Organizing capitals in more valuable ways
- 10. Output Output =Y Capital = K Function of your capitals Y = F(K)
- 11. Growth Change in Output ∆Y Growth = g g = ∆Y ÷Y
- 13. Tree Capital K Fruit Output Y Relationship Ratio v= $100 = $25= 4 K vY= 100 4 25=
- 14. Output = Capital Constant Y = K v Harrod-Domar Growth Model
- 15. The v constant is very important v indicates productivity smaller the v the greater productivity Harrod-Domar Growth Model
- 16. Harrod-Domar Growth Model Y = K v v = K Y K = Yv 25 = 100 4 4 = 100 25 100 =25 x 4
- 17. If you want more outputY? Cannot change v Increase Capital K K vY= 100 4 25=
- 18. Change in Output? Change Output = Change in Capital ÷ v K vY= Total Output ∆K v∆Y= Rate of Change = ∆Y ÷Y = Growth Rate = g ∆K v∆Y Y Y g = = = ∆K Yv
- 19. K vY =Total Output Rate of Change ∆K Yvg =
- 20. Trees get old and die Depreciation d Loss in Capital eachYear d x K or dK
- 21. Income Y Savings S Investment I = S = sY S = I =
- 22. Change in Capital = Investment - Depreciation ∆K = I - (dK) ∆K = sY - dK Depreciate Investment
- 24. g = s v - d growth = Harrod-Domar Growth Model savings - depreciation constant
- 26. Harrod-Domar Growth Model Y = K v g = (s/v) - d
- 27. g = (s/v) - d deprecation = d = 5% savings = s = 24% incremental capital output ratio = ICOR = v = 3 g = (24%/3) - 5% g = 3%
- 29. Just add capital and output increases Harrod-Domar Growth Model
- 30. Problems Assumes saving is sufficient Not all investments are positive Fixed v - no flexibility Harrod-Domar Growth Model