Harrod-Domar's Theory: The Models Of The Economic Growth

The models of the economic growth, which examine the long-run rise of economy’s production capacities, allow specialists to have a wider outlook at the current economic problems appearing within the countries and at the international arena from the side of the whole historical process of economic development. The main concern of these models is more general and probably more important issues in economics, such as changes in the standards of living, development of scientific and technological progress, population growth and the others. To start with, the Harrod-Domar model is to be examined and explained in order to delve into the concept of the economic growth. The key assumption of this theory is an abstention from the current consumption
Domar’s growth model considers the supply side first, that is, the capacity effect of investment. His theory is based on the idea of macroeconomic balance which states that savings is a leakage from the system where income flows “out” as the firms produce and flows “into” as the households purchase the goods produced, while the demand for consumption goods falls short of the income that created this demand, and balance is achieved after the leakages by the investment demand for capital goods. In his theory, Domar claimed that an increase in national output of an economy depends on the increase in the increase in the stock of capital that is created by the savings and investment demand. To put it simply, economic growth is positive when investment exceeds the amount of necessary to replace depreciated capital and allows the next period’s cycle to recur on a large scale. That is the reason why the volume of savings and investment are crucially important determinants of the growth rate of an economy, according to
The first controlled experiment in applying this theory in the world was in the former Soviet Union, after the Bolshevik Revolution in 1917. Within a space of five years, real national income almost doubled, although it stayed slowly below the plan target. What is more, gross industrial production increased by almost 2.5 times, which was mainly due to rapid expansion in the machine producing sector. So, the impact of increasing capital goods demand cannot be underestimated in the Soviet Union economic growth