The Harrod-Domar Model
Main Prediction: gross domestic intersection point growth is comparative to the share of investment spending in gross domestic product. Assumptions: 1. Assume lazy labor, so there is no constraint on the proviso of labor. 2. Production is proportional to the stock of machinery.
Growth Rate of gross domestic product We want to determine the growth step of gross domestic product, which is defined as: G(Y) = (change in Y) / Y where Y = GDP
To do this, we estimate the additive Capital-Output Ratio (ICOR), which is a measure of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = capital stock
A mettlesome ICOR implies a high adjoin in capital stock relative to the increase in GDP. Thus, the higher the ICOR, the lower the productivity of capital. Since capital is pretended to be the only binding production constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) But investment is withal tinge to savings (S), which is equal to the average propensity to save (APS) times GDP (Y).
Denote APS = s I = S = APS * Y = s*Y So, ICOR = (s Y) / (change in Y) Rearranging terms, G(Y) = (change in Y) / Y = s / ICOR Growth Rate of GDP per Capita The growth yard of GDP per Capita is defined as G(Y/P) = G(Y) G(P) From (1), G(Y/P) = s / ICOR - G(P) (2) where G(P) = the tribe growth rate (1)
Thus, a 1 percentage increase in population growth will cause the growth rate of GDP per capita to decrease by 1 percent. The empirical question is whether polity makers can achieve a constant marginal product of capital when the centralize investment decisions.
Examples 1. Assume that a ground has a savings/investment rate of 4 percent of their GDP and an ICOR of 4, they will stick out a growth rate of 1 percent. But if the population growth rate were also 1 percent, then the country would have zero GDP growth per capita. These assumptions imply that for a country to develop, it needed to have an investment rate of around 12-15 percent of GDP,...If you want to fuck off a full essay, order it on our website: Ordercustompaper.com
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