Download Harrod-Dommar Model





Farzana sher muhammad
Aleena ilyas
Saeeda
Saqiba
Harrod-Domar Model

The Harrod Domar Model was developed
in 1940’s. It is the first approach of the
classic theories of economic development
which explains how economic growth is
possible in developing countries. Basically,
it is a growth model which states the rate
of economic growth in an economy is
dependent on the level of saving and
the capital output ratio.
Main Theme of Model


If there is a high level of saving in a country, it provides
funds for firms to borrow and invest. As a result, the
Investment increases the capital stock of an economy
and generates economic growth through the increase in
production of goods and services.
Furthermore, they assume some direct economic
relations between size of the total capital stock (K) and
total GDP (Y). This relationship is called capital output
ratio. This capital output ratio measures the productivity
of the investment that takes place. If capital output ratio
decreases the economy will be more productive, so
higher amounts of output is generated from fewer
inputs. This again, leads to higher economic growth.





According to this model, the equilibrium growth rate for the
economy is.
Let Y be GDP and S be savings. The level of savings is a function
of the level of GDP, say S = sY. where s represents net saving ratio
(a fixed proportion of national income or GDP).
Net investment is defined as an increase in the existing capital
stock (k)
I = ΔK
Where, the level of capital K needed to produce an output Y is
given by the equation K = σ Y where σ is called the capital-output
ratio. Investment is a very important variable for the economy
because Investment has a dual role.
Investment represents an important component of the demand for
the output of an economy as well as the increase in capital stock.
Thus ΔK = σ ΔY. For equilibrium there must be a balance between
supply and demand for a nation's output. In simple case this
equilibrium condition is I = S. Thus,
I = ΔK = σΔY
S =sY= I = ΔK = σ ΔY
So simply as, sY= σ ΔY
therefore, the rate of economic growth(g) is
g = ΔY/Y = s/ σ
 This equation tells us that the growth rate is directly
related to the saving ratio and negatively related to
economies capital output ratio.
Obstacles in Harrod Domar Model





At that time, many economists considered labor force as an
important component of economic growth. Because labor is
assumed to be abundant in developing countries and can be
hired as needed to capital investment. In this model labor force
is not described explicitly.
In this model, capital output ratio is assumed to be fixed at 3:1
i.e. if σ =3% and net saving ratio is 15% of GDP. Then growth
rate is g = ΔY/Y = s/ σ =15%/3% = 5%.It means that for the
growth rate of 5% country must save 15 % of GDP, which is
impossible in developing countries.
Rate of interest is fixed in this model.
Depreciation of machinery is excluded.
Government intervention is ignored in the model.