Harrod-Domar06

ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main Prediction: consummate(a) home(prenominal) intersection point reaping is comparative to the share of investiture spending in gross domestic crossroad. Assumptions: 1. Assume idle labor, so there is no constraint on the provision of labor. 2. Production is proportional to the stock of machinery. Growth Rate of gross domestic product We indispensability to determine the growth dance 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 additive Capital-Output symmetry (ICOR), which is a measure of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = chief city stock A mettlesome ICOR implies a eminent adjoin in capital stock relative to the join on in gross domestic product. Thus, the higher the ICOR, the lower the productivity of capital. Since capital is feign to be the only binding producti on constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) But investment is withal ghost to savings (S), which is equal to the average propensity to save (APS) multiplication GDP (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 count (1) Thus, a 1 percentageage increase in cosmos growth will cause the growth footstep of GDP p er capita to decrease by 1 percent. The empi! rical question is whether formula makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a scope has a savings/investment rate of 4 percent of their GDP and an ICOR of 4, they will stick out a growth rate of 1 percent. But if the population growth rate were also 1 percent, then the country would have home in GDP growth per capita. These assumptions imply that for a country to develop, it mandatory 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: BestEssayCheap.com

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