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Harrod-Domar Growth Model - Essay Example

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The research has identified several assumptions of Harrod-Domar growth model. The first one is that H-D model is an investment-driven growth model. Additionally today we often referred to this model as AK model whose aggregate production function is Y=AK…
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Harrod-Domar Growth Model
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Harrod-Domar Growth Model

Download file to see previous pages... According to the research findings, it can, therefore, be said that in the closed economy, saving equals to investment, and saving is some proportion of income as well. Thus we find that saving equals to saving rate times income equal to investment (St=sYt=It). The last one is that we can write the capital-accumulation in the form of Kt+1=(1-d)*Kt+It, where K is capital stock and d is the rate of capital depreciation. Based on all assumptions and according to the mathematics, in order to simplify all equations and use Log method, we can get the growth rate of GDP is gY=s*A-d, where d is the depreciation rate of capital. This is the main idea of the H-D model. Based on the result, the growth rate of an economy, therefore, depends on the saving rate. It means that saving rate will promote economic growth. However, it must be satisfying the assumptions, otherwise, the result will be different. Here is an example to prove it. The data source from Gapminder World; as indicated in the graph below proves that there is no relationship between investment and GDP/capita growth in 1970 and 2010. In summary, the H-D model cannot completely explain the fact that the rate of saving can prove economic growth. The model has to satisfy all the assumptions otherwise the results obtained will be different. This paper also illustrates why developing countries are developing faster than western countries. There are two sets data from World Bank. The first one is about Canada which is developed the country and the second one is about China, which is developing the country. According to the table, one can see that China’s GDP is much great than Canada’s, and all the percentage value larger than Canada. This is, therefore, an indication that China growths faster than Canada. Solow model can play a significant role in explaining this phenomenon. One assumption of the model is the constant return on the scale. This means that all input is increased by the same amount the output. The assumption, therefore, yields the aggregate production as follows; Y=F(K, L). ...Download file to see next pagesRead More
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