Lecture No.9 Explain R.F Harrod | Evsey Domer Of Model Of Economic Growth.

Lecture No.9

Explain R.F Harrod And Evsey Domer Model Of Economic Growth.                                                 OR

In What Sense Horrod Domer Model is a Razor Edge Model Explain It?

Explain The Concept of Warranted Growth Rate.

Background.

Growth model actually have been given by the post Keynesian economist before 1930 and even in the period of J.M Keynes attention was given to the problem of short run period with the assumption of given capital and Technology. The growth model after Keynes relax these two assumption. They focus there attention to the long period run problem of the income determination. R.F Horrod and E.Domer work the first to develop the theory of economic growth. Horrod in an article, an essay in dynamic theory published in 1939 and E.Domer in an article expansion and Employment published in March 1947. These two articals are the base of harrod domer model. This model explain two fundamental problem or aspects.

1. How capital accumulation play a double role in the economy.

2. Role of saving

3. Problem of growth rate of labor force.

in the horrod model capital accumulation play a double role in the economy. This is actually a concept of given by Domar. Therefore, this is also called Domar model of economic growth.

Explain the Double Role of Capital Accumulation

On the one hand investment expenditure is a component of A.D . In the other words we can say that capital accumulation effect on A.D, on one side and else on A.S other side we can construct single domor model by assuming 2 sector close economy. In which AD is a sum of consumption and investment as below:

AD  =  c + Ia

AD  =  YD  =  c + Ia

YD =Y in two sector economy because c= a+by and I =Ia

Yd = a + by + Ia

The above equation shows that capital accumulation of effact of AD.


Δyd = 1/s[ΔIa]

We can explain other aspect of capital accumulation that how AS is affected by it. To explain it, we must known relationship between output and input. In Horrad Domar model AS is directly proportional to the volume of capital stock and capital output ratio as shown below:

AS = δk             Δ = Capital Output Ratio

                          K = Capital Sectors

The change in AS lake place due to change in the capital stock as below:

ΔAS = δΔk

Because by definition change in capital stock during any time period is in net investment

The above equation of a s can be written as below:

Δ AS = δI                                      ΔK = Net Investment

In this way capital accumulation effect as in the economy. We can write the double role of capital accumulation in the equation below:

Δ yd= [δIa]            (1) Effect on A.D

Δ ys= δI                   (1) Effect on A.S

If full employment of capital stock is to be maintained AD must grow in step with AS or other words AD must be equal to AS as below:

AD  =   AS

Δ yd= [δIa] = δI                         OR

The above question can written down with the help of cross multiplication as  below:

ΔIa/I = Sδ                         OR                               ΔIa/I = δs

In the above question we have to see the concept of MPS.

Roll of Saving in Harrod Domar Model:

In the harrod Domar model saving is a constant fraction of income. In this way APS and MPS both are identical, so that saving is equal to S=Sy

S=mps

For the economy to be in equilibrium saving must be equal to investment in this way state of growth of output will be equal to:

Δy/y=δs

The above equation showed add rate of growth of output is at the same rate sum on which investment is going on. In this way expanding capital stock will remain fully utilize over time. This is called warranted rate of growth δ.

Author: Nasir Mehmood Ch                 مصنف: ناصرمحمود چوہدری 

Email: Nasirmehmoodch97@gmail.com