Harrod-Domar Model

• Explain the Harrod-Domar Model:

  • Emphasises role of savings to help fund capital investment
  • Theory tests that investment, savings & technological changes are key variables in determining EG.
  • Intro of new physical capital where new technology can produce more output than a unit of the old capital using less advanced technology.
  • Increasing rate of EG done through increasing savings ratio in economy to help with investment or improve technology to increase output.
  • A country that’s poor is unable to do this, and will then rely on foreign aid. If used to boost investment, it will fill savings gap.
• How can the Harrod-Domar Model diagram be described as?

  Circular
• What are the four main circular points involved in the Harrod-Domar Model diagram?

  • increased savings
  • increased investment
  • higher capital stock
  • higher economic growth
• What are the constraints to the Harrod-Domar Model?

  • Persistent savings gap in some countries
  • Small scale financial institutions
  • Deep weakness in human capital - how good is the human labour to be using the capital equipment
  • Risks of borrowing to fund savings gap