What are the Advantages and Disadvantages of the Harrod-Domar Model THeory?
The Harrod-Domar model is used in development economics to explain an economy’s growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Sir Roy F. Harrod in 1939 and Evsey Domar in 1946. The Harrod-Domar model was the precursor to the Exogenous growth model. Overview According to the model there are three concepts of growth: Warranted growth – the rate of output growth at which firms believe they have the correct amount of capital and therefore do not increase or decrease investment, given expectations of future demand. Natural rate of growth – The rate at which the labour force expands, a larger labour force generally means a larger aggregate output. Actual growth – The actual aggregate output change. Two possible problems are observed in an economy according to the Harrod-Domar model. First, the relationship between the actual and natural (popu
