Harrod-Domar06

ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main prevision: flagrant home(prenominal) overlap point proceeds is comparative degree to the share of enthronement disbursement in gross home(prenominal) harvest-tide. Assumptions: 1. Assume lazy labor, so there is no backwardness on the proviso of labor. 2. issue is proportional to the stock of machinery. reaping Rate of gross domestic product We urgency to encounter the growth step of gross domestic product, which is defined as: G(Y) = (change in Y) / Y where Y = gross domestic product To do this, we estimate the running(a) Capital-Output Ratio (ICOR), which is a standard of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = big(p) stock A mettlesome ICOR implies a gritty adjoin in outstanding stock relative to the profit in gross domestic product. Thus, the higher the ICOR, the swallow the productivity of capital. Since capital is fancied to be the only stuffing production constraint, investment funds (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) entirely investment is withal impact to savings (S), which is equal to the clean propensity to save (APS) multiplication gross domestic product (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 arrange (1) Thus, a 1 pct increase in existence growth will movement the growth point of GDP per capita to decrease by 1 per centum. The empirical question is whether economy makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a backdrop has a savings/investment prize of 4 percent of their GDP and an ICOR of 4, they will scotch out a growth rate of 1 percent. that if the population growth rate were also 1 percent, therefore the country would have slide fastener GDP growth per capita. These assumptions point that for a country to develop, it inevitable 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: Orderessay

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