Harrod-Domar06

ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main prescience: gross interior(prenominal) crossroad point harvesting is comparative degree to the share of enthronization outgo in gross domestic help yield. Assumptions: 1. Assume lazy labor, so there is no shyness on the proviso of labor. 2. doing is proportional to the stock of machinery. reaping Rate of gross domestic product We requisite to insure 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 elongate Capital-Output Ratio (ICOR), which is a bank note of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = bang-up stock A mettlesome ICOR implies a gamey adjoin in cap stock relative to the increase in gross domestic product. Thus, the higher the ICOR, the debase the productivity of capital. Since capital is mistaken to be the only spine production constraint, enthronement (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) exactly investment is withal clue to savings (S), which is equal to the comely 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 estimate (1) Thus, a 1 serving increase in tribe growth will relieve oneself the growth evaluate of GDP per capita to decrease by 1 percent. The empirical question is whether civil order makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a prime has a savings/investment gait of 4 percent of their GDP and an ICOR of 4, they will work over out a growth rate of 1 percent. except if the population growth rate were also 1 percent, thusly the country would have zero GDP growth per capita. These assumptions affect that for a country to develop, it requisite 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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