Describe and explain the simple Harrod-Domar Growth Model and its relevance to India’s Five Year Plans.

The Harrod -Domar growth model goes on to explain the relationship between economic growth, which is the level of savings and capital in terms of productivity required. This is widely used in developing countries. This model was developed independently by Roy Harrod and Evsey Domar in 1940. This model is based on real life happenings which can be observed like not all people that live do work. Therefore there is unemployment and goes ahead to explain that capital(which is money) is the binding constraint on production and growth.

The growth An aggregate production function is the base for any economic growth model. It’s function can take up in different forms, where we can calculate production and output. Factors that can have an impact on the outcome are based on (agriculture, heavy industry,light labour,intensive manufacturing

Knowing the difference between economic growth and development will only give rise to national income.

Whts the growth model – explain each formauls and wht it means How did help in Indians development
How the 5 yr plan works y it was introduced spk abt 1 o0 2 of the 11 plans available.

The relevance that the growth model has to India’s five year plan is that India’s GDP grew at a rate of 4% per year during the first two Five year plans which was from 1951-56 and 1956-61. This rate of growth is reported to be 2 to 3 times higher than the rate recorded under the British administration. During this period it is where it opened doors to licensing of private investments in certain sectors. Then prime Minister Nehru

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Growth rates
1) China’s GDP increased from $997.5 billion in 1999 to $1,076.9 billion in 2000. Calculate the growth rate of China’s GDP in 2000 (this data is from http://www.worldbank.org).
2) India’s real GDP per capita (PPP) grew at an average annual rate of 2.00% from 1960 through 1996, increasing from $769 to $1,546. Assuming India’s GDP per capita continues growing at this average rate from 1996 through 2046, what will India’s real GDP per capita equal in 2046?
3) China’s real GDP per capita (PPP, 1985 constant prices) increased from $564 in 1960 to $2,374 in 1996. Calculate the average annual growth rate of China’s real GDP per capita over the period 1960-1996.
The Harrod-Domarmodel
4) From 1980 to 1990, real GDP in India grew by 5.8 percent per annum, while investment averaged 23.1 percent of GDP. What was the ICOR for India between 1980 and 1990?
5) In Indonesia during the 1970s the incremental capital-output ratio (ICOR) averaged 2.50.
a. Using the Harrod-Domargrowth equation, what saving rate would have been required for Indonesia to achieve an aggregate growth rate of 8 percent per annum?
b. With the same ICOR, what growth target could be achieved with a saving rate of 27 percent?
c. If there is a large increase in the saving rate, and therefore a large increase in the amount of new...

...THE HARROD – DOMARMODELS
Both Harrod and Domar are interested in discovering the rate of income growth necessary for a smooth and uninterrupted working of the economy. Harrod and Domar assign a key role to investment in the process of economic growth. So long as net investment is taking place, real income and output will continue to expand.
Assumptions
1. There is an initial full employment equilibrium level of income.
2. There is the absence of government interference.
3. These models operate in a closed economy which has no foreign trade.
4. There are no lags in adjustments between investment and creation of productive capacity.
5. The average propensity to save is equal to the marginal propensity to save.
6. The marginal propensity to save remains constant.
7. The capital coefficient, i.e., the ratio of capital stock to income is assumed to be fixed.
8. There is no depreciation of capital goods which are assumed to possess infinite life.
9. Saving and investment relate to the income of the same year.
10. The general price level is constant.
11. There are no changes in interest rates.
12. There is a fixed proportion of capital and labour in the productive process.
13. Fixed and circulating capitals are lumped together under capital.
14. There is only one type of product.
The...

...3.6 THE IMPORTANCE AND LIMITATIONS OF THE MODELS TO UNDERDEVELOPED COUNTRIES
The Harrod-Domarmodel like we have been taught was formulated to maintain the steady growth rate in developed economies of the world and not to address the problem of vicious cycle faced by the developing countries. Be that as it may, the model could still be used to aid in analyzing the growth process in less developed countries. The importance of this model to the developing countries is explained below.
The Harrods-Domarmodels are based on three principal concepts: the saving function, autonomous vs. induced investment, and the productivity of capital. These concepts were primarily developed in order to illuminate secular stagnation that was threatening the advanced economies in the post-war period. The models show us the rate at which the economy must grow if it is to make full use of the capacity created by new investment and it gave a projection of capital-output ratio of between 2.5 and 5, this rate can also be
applied in less developed countries.
Harrod in his Second Essay on Dynamic Theory which he tagged “natural rate of interest”, tried to make his model more applicable to underdeveloped countries. He carefully elaborated the supply side of his fundamental equation by introducing the role...

...ECON 1910 Spring 2012 Lind / Willumsen
Short solution proposal to the compulsory assignment in ECON1910
Problem 1: Harrod-Domar vs. Solow. In the Harrod-Domarmodel a change in the savings rate (s) has a permanent eﬀect on the growth rate of GDP per capita, while in the Solow model a change in the savings rate has only a temporary eﬀect on the growth rate of GDP per capita. Why is this the case? Answer: The main diﬀerence between the Harrod-Domar (HD) model and the Solow model is that HD assumes constant marginal returns to capital, while Solow assumes decreasing marginal returns to capital. The reason that a change in the savings rate has a permanent eﬀect in HD, while only a temporary eﬀect in Solow, is exactly due to the diﬀerences in assumptions on the marginal returns to capital. To see why, assume that we initially are in the steady state in the Solow model, where investments exactly are equal to break-even investments (i.e. the amount of investments syt are equal to (n + δ)kt , the amount of investment that needs to be undertaken in order for the capital stock per capita next period to be the same size as today). If we increase the savings rate in the Solow model from s to s , we will in the next period have more capital per capita than before, as...

...Solow model - how well it holds in the real world?
Prepared by:-
Amol Rattan (75013)
Introduction
Prior to Solow Model, HarrodDomarmodel had shown how the savings rate could play a crucial role in determining the Long run rate of Growth. Solow model however proved a result that was contrary to what HarrodDomarmodel had predicted.
It showed that savings has only level effect on income and the growth rate of income depends upon the rate of efficiency or technical progress in the country.
Solow Model relies on certain assumptions
1. There are constant returns to Scale(CRS)
2. The production function is standard neoclassical production function with diminishing returns to factor
3. The markets are perfectly competitive
4. Households save at a constant savings rate ‘s’
Equilibrium in Solow Model is defined as the steady state level of capital where the economy grows at a constant rate. By assuming that the two factors of production are capital and labour per efficiency unit, it can be shown that savings only affects the level of per capita income. It is only the rate of growth of efficiency which determines the rate of growth of per capita output.
For production function:...

...use of electronic calculators is not permitted.
P.T.O
SECTION A: Answer any 3
1. The Solow model emphasizes the role of which of the following factors of production?
(a) Land
(b) Labor
(c) Capital
(d) Natural resources [16 marks]
2. In an exogenous growthmodel, growth is caused by
(a) capital accumulation.
(b) government policies.
(c) human capital accumulation.
(d) forces that are not explained by themodel itself. [16marks]
3. Suppose that two countries share identical levels of total factor productivity, identical labor force growth rates and identical savings rates. According to the Solow model
(a) the country with the greater initial level of output per worker will grow more rapidly
than the country with the smaller initial level of output per worker.
(b) the country with the smaller initial level of output per worker will grow more rapidly
than the country with the greater initial level of output per worker.
(c) both countries will have the same growth rates of output per worker, even if they start
out with different levels of output per worker.
(d) if both countries start out with different levels of income per worker, both countries
may have different growth rates of output per worker, but we cannot be certain which
country will have the higher growth rate of output per worker. [16...

...“Countries grow at different rates because they accumulate capital at different rates.” Is
this true? Explain your answer.
Eyeballing any cross sectional data on growth across countries shows that countries grow at different rates. Many theories try to explain this phenomenon with emphasis with capital accumulation being one of them. I will start by developing the standard neoclassical growthmodel as developed by Solow(1956)[1]. I will then proceed to discuss the extensions that have been made to this basic model in an attempt to better understand actual growth figures, for e.g. the standard neoclassical model cannot explain the magnitude of international differences in growth rates. Mankiw[2] points out that “the model can explain incomes that vary by a multiple of slightly more than two. Yet income per person varies by a multiple of more than ten.”
Economic growth is conventionally measured with the percentage of increase in Gross Domestic Product(GDP). Statistics from the OECd shows the big divergence of GDP annual growth rates from 1998 to 2002 between countries. The top GDP growth rate countries were Ireland and China at 8.1% while the bottom GDP growth rate is that of Japan at only 0.2%. In the standard neoclassical model, GDP denoted by Y is a function of two factors...

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The Solow GrowthModel
Economics 202
14 April 2014
Statement on plagiarism: I understand that plagiarism is a serious offence and confirm that unless otherwise acknowledged the content of this essay is my own.
Economic growth rates across countries are hardly ever the same and the Solow-growthmodel is the starting point at determining why growth rates differ across countries (Burda and Wyplosz, 2013: 61). This essay aims at examining the aspects of the Solow-Growthmodel of economic growth while highlighting the strengths and weaknesses and identifying whether or not capital accumulation has been the main cause for economic growth in South Africa. This will be achieved through examining economic growth with capital-stock growth, population growth and technological progress.
The Solow-growthmodel measures growth rates of different economies and according to Solow, it is the starting point to determining why these growth rates differ across economies (Burda and Wyplosz, 2013). The Solow-growthmodel is an exogenous growthmodel which means variables are determined outside the field under study, making it a traditional Neo-classical...