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Harrod-Domar Model Basics (in Hindi)
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This lesson explains about the Harrod-Domar Model Assumptions.

Tanya Bhatia is teaching live on Unacademy Plus

Tanya Bhatia
Topper in 12th Cbse JRF holder Eco hons. Shyam Lal College DU, M.A in Economics. Expert in NET for Economics.Teaching is work of heart❤❤❤

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tricks are very useful sir thank you
7 vje vali class nhi hh aj mam kya pla reply
  1. HARROD-DOMAR MODEL BY TANYA BHATIA


  2. INTRODUCTION IT ASSUMES SUBSTITUTION BETWEEN CAPITALAND LABOUR AND A NEUTRAL TECHNICAL PROGRESS IN THE SENSE THAT TECHNICAL PROGRESS IS NEITHER SAVING NOR ABSORBING OF LABOUR OR CAPITAL BOTH THE FACTORS ARE USED IN THE SAME PROPORTION EVEN WHEN NEUTRAL TECHNICAL TAKES PLACE. WE DEAL WITH THE PROMINENT GROWTH MODELS HERE ALTHOUGH HARROD AND DOMAR MODELS DIFFER IN DETAILS, THEY ARE SIMILAR IN SUBSTANCE. ONE MAY CALL HARROD'S MODELAS THE ENGLISH VERSION OF DOMAR'S MODEL. BOTH THESE MODELS STRESS THE ESSENTIAL CONDITIONS OF ACHIEVING AND MAINTAINING STEADY GROWTH. HARROD AND DOMAR ASSIGN A CRUCIAL ROLE TO CAPITAL ACCUMULATION IN THE PROCESS OF GROWTH. IN FACT, THEY EMPHASISE THE DUAL ROLE OF CAPITAL ACCUMULATION


  3. BASICS OF MODEL ON THE ONE HAND, NEW INVESTMENT GENERATES INCOME ITHROUGH MULTIPLIER EFFECTI; ON THE OTHER HAND, IT INCREASES PRODUCTIVE CAPACITY ITHROUGH PRODUCTIVITY EFFECTI OF THE ECONOMY BY EKPANDING ITS CAPITAL STOCK. IT IS PERTINENT TO NOTE HERE THAT CLASSICAL ECONOMISTS EMPHASISED THE PRODUCTIVITY ASPECT OF THE INVESTMENT AND TOOK FOR GRANTED THE INCOME ASPECT.KEYNES HAD GIVEN DUE ATTENTION TO THE PROBLEM OF INCOME GENERATION BUT NEGLECTED THE PROBLEM OF PRODUCTIVE CAPACITY CREATION. HARROD AND DOMAR TOOK SPECIAL CARE TO DEAL WITH BOTH THE PROBLEMS GENERATED BY INVESTMENT IN THEIR MODELS


  4. GENERAL ASSUMPTIONS D A FULL-EMPLOYMENT LEVEL OF INCOME ALREADY EXISTS. [ID THERE IS NO GOVERNMENT INTERFERENCE IN THE FUNCTIONING OF THE ECONOMY. CIID THE MODEL IS BASED ON THE ASSUMPTION OF "CLOSED ECONOMY." IN OTHER WORDS, GOVERNMENT RESTRICTIONS ON TRADE AND THE COMPLICATIONS CAUSED BY INTERNATIONAL TRADE ARE RULED OUT (IVI THERE ARE NO LAGS IN ADJUSTMENT OF VARIABLES I.E., THE ECONOMIC VARIABLES SUCH AS SAVINGS, INVESTMENT, INCOME, EXPENDITURE ADJUST THEMSELVES COMPLETELY WITHIN THE SAME PERIOD OF TIME. W THE AVERAGE PROPENSITY TO SAVE [APS) AND MARGINAL PROPENSITY TO SAVE IMPSI ARE EQUAL TO EACH OTHER, APS = MPS OR WRITTEN IN SYMBOLS.


  5. GENERAL ASSUMPTIONS VID BOTH PROPENSITY TO SAVE AND "CAPITAL COEFFICIENT" CI.E., CAPITAL-OUTPUT RATIO) ARE GIVEN CONSTANT. THIS AMOUNTS TO ASSUMING THAT THE LAW OF CONSTANT RETURNS OPERATES IN THE ECONOMY BECAUSE OF FIXITY OF THE CAPITA-OUTPUT RATIO. NID INCOME, INVESTMENT, SAVINGS ARE ALL DEFINED IN THE NET SENSE, IE, THEY ARE CONSIDERED OVER AND ABOVE THE DEPRECIATION. THUS, DEPRECIATION RATES ARE NOT INCLUDED IN THESE VARIABLES VIID SAVING AND INVESTMENT ARE EQUAL IN EX-ANTE AS WELL AS IN EX-POST SENSE IE, THERE IS ACCOUNTING AS WELL AS FUNCTIONAL EQUALITY BETWEEN SAVING AND INVESTMENT


  6. HARROD MODEL IN ORDER TO DISCUSS THESE ISSUES, HARROD HAD ADOPTED THREE DIFFERENT CONCEPTS OF GROWTH RATES: (I) THE ACTUAL GROWTH RATE, G, [Il THE WARRANTED GROWTH RATE, Gw III THE NATURAL GROWTH RATE, GH N-


  7. THE ACTUAL GROWTH RATE (G) IS DETERMINED BY SAVING-INCOME RATIO AND CAPITAL- OUTPUT RATIO BOTH THE FACTORS HAVE BEEN TAKEN AS FIXED IN THE GIVEN PERIOD. THE RELATIONSHIP BETWEEN THE ACTUAL GROWTH RATE AND ITS DETERMINANTS WAS EXPRESSED AS WHERE G IS THE ACTUAL RATE OF GROWTH, C REPRESENTS THE CAPITAL-OUTPUT RATIO AK/AY AND S REFERS TO THE SAVING-INCOME RATIO AS/AY. THIS RELATION STALES THE SIMPLE TRUISM THAT SAVING AND INVESTMENT IN THE EK-POST SENSE ARE EQUAL IN EQUILIBRIUM. THIS IS CLEAR FROM THE FOLLOWING DERIVATION.


  8. Since .S Because Substituting the valuc of G. C. and s in cquation (I), we gct or or


  9. THIS RELATION EXPLAINS THAT THE CONDITION FOR ACHIEVING THE STEADY STATE GROWTH IS THAT EX- POST SAVINGS MUST BE EQUAL TO EX-POST INVESTMENT"WARRANTED GROWTH" REFERS TO THAT GROWTH RATE OF THEECONOMY WHEN IT IS WORKING AT FULL CAPACITY. IT IS ALSO KNOWN AS FULL CAPACITY GROWTH RATE. THIS GROWTH RATE DENOTED BY Gw IS INTERPRETED AS THE RATE OF INCOME GROWTH REQUIRED FOR FULL UTILISATION OF A GROWING STOCK OF CAPITAL, SO THAT ENTREPRENEURS WOULD BE SATISFIED WITH THE AMOUNT OF INVESTMENT ACTUALLY MADE. WARRANTED GROWTH RATE (Gw IS DETERMINED BY CAPITAL-OUTPUT RATIO AND SAVING-INCOME RATIO. THE RELATIONSHIP BETWEEN THE WARRANTED GROWTH RATE AND ITS DETERMINANTS CAN BE EXPRESSED AS WHERE CR SHOWS THE NEEDED C TO MAINTAIN THE WARRANTED GROWTH RATE AND S IS THE SAVING-


  10. LET US NOW DISCUSS THE ISSUE: HOW TO ACHIEVE STEADY GROWTH? ACCORDING TO HARROD, THE ECONOMY CAN ACHIEVE STEADY GROWTH WHEN G=GW AND C = CR THIS CONDITION STATES, FIRSTLY, THAT ACTUAL GROWTH RATE MUST BE EQUAL TO THE WARRANTED GROWTH RATE. SECONDLY, THE CAPITAL-OUTPUT RATIO NEEDED TO ACHIEVE G MUST BE EQUAL TO THE REQUIRED CAPITAL-OUTPUT RATIO IN ORDER TO MAINTAIN Gw, GIVEN THE SAVING CO-EFFICIENT ISI. THIS AMOUNTS TO SAYING THAT ACTUAL INVESTMENT MUST BE EQUAL TO THE EXPECTED INVESTMENT AT THE GIVEN SAVING RATE.


  11. INSTABILITY OF GROWTH


  12. We analyse the situation where G is greater than Gw. Under this situation, the growth rate of income being greater than the growth rate of output, the demand for output (because of the higher level of income) would exceed the supply of output (because of the lower level of output) and the economy would experience inflation. This can be explained in another way too when C C Under this situation, the actual amount of capital falls short of the required amount of capital This would lead to deficiency of capital, which would, in turn, adversely affect the volume of goods to be produced. Fall in the level of output would result in scarcity of goods and hence inflation. This, under this situation the economy will find itself in the quagmire of inflation then <C,


  13. FROM THE ABOVE ANALYSIS, IT CAN BE CONCLUDED THAT STEADY GROWTH IMPLIES A BALANCE BETWEEN G AND Gw IN A FREE-ENTERPRISE ECONOMY, IT IS DIFFICUIT TO STRIKE A BALANCE BETWEEN G AND Gw AS THETWO ARE DETERMINED BY ALTOGETHER DIFFERENT SETS OF FACTORS. SINCE A SLIGHT DEVIATION OF G FROM Gw LEADS THE ECONOMY AWAY AND FURTHER AWAY FROM THE STEADY-STATE GROWTH PATH, IT IS CALLED KNIFE-EDGE' EQUILIBRIUM.


  14. COMPARING THE SECOND AND THE THIRD RELATIONS ABOUT THE WARRANTED GROWTH RATE AND THE NATURAL GROWTH RATE WHICH HAVE BEEN GIVEN ABOVE, WE MAY CONCLUDE THAT G MAY OR MAY NOT BE EQUAL TO Gw, IN CASE G, HAPPENS TO BE EQUAL TO G THE CONDITIONS OF STEADY GROWTH WITH FULL EMPLOYMENT WOULD BE SATISFIED. BUT SUCH A POSSIBILITY IS REMOTE BECAUSE OF THE VARIETY OF HINDRANCES ARE LIKELY TO INTERVENE AND MAKE THE BALANCE AMONG ALL THESE FACTORS DIFFICULT. AS SUCH THERE IS A DEFINITE POSSIBILITY OF INEQUALITY BETWEEN G, AND Gw IF G, EXCEEDS Gw GWOULD ALSO EXCEED Gw FOR MOST OF THE TIMEAS IS SHOWN IN FIGURE 17.1 AND THERE WOULD BE A TENDENCY IN THE ECONOMY FOR CUMULATIVE BOOM AND FULL EMPLOYMENT. SUCH ASITUATION WILL CREATE AN INFLATIONARY TREND


  15. THE DOMAR MODEL DOMAR VIEWED GROWTH FROM THE DEMAND AS WELL AS THE SUPPLY SIDE. INVESTMENT ON THE ONE SIDE INCREASES PRODUCTIVE CAPACITY AND ON THE OTHER GENERATES INCOME. BALANCING OF THE TWO SIDES PROVIDES THE SOLUTION FOR STEADY GROWTH. THE FOLLOWING SYMBOLS ARE USED IN DOMAR'S MODEL. Y,-LEVEL OF NET NATIONAL INCOME OR LEVEL OF EFFECTIVE DEMAND AT FULL EMPLOYMENT [DEMAND SIDE) Y,-LEVEL OF PRODUCTIVE CAPACITY OR SUPPLY AT FULL-EMPLOYMENT LEVEL SUPPLY SIDE


  16. K = REAL CAPITAL 01 = NET INVESTMENT WHICH RESULTS IN THE INCREASE OF REAL CAPITAL LE., AKA = MARGINAL PROPENSITY TO SAVE, WHICH IS THE RECIPROCAL OF MULTIPLIER. A [SIGMA) IS PRODUCTIVITY OF CAPITAL OR OF NET INVESTMENT. THE DEMAND SIDE OF THE LONG-TERM EFFECT OF INVESTMENT CAN BE SUMMARISED THROUGH THE FOLLOWING RELATION. THIS RELATION IS A SIMPLE APPLICATION OF KEYNES INVESTMENT MULTIPLIER Y1/A.


  17. HIS RELATION TELLS US ( THAT THE LEVEL OF EFFECTIVE DEMAND TY, IS DIRECTLY RELATED TO THE LEVEL OF INVESTMENT THROUGH THE MULTIPLIER WHOSE VALUE IS GIVEN BY 1/A.ANY INCREASE IN THE LEVEL OF INVESTMENT WILL DIRECTLY INCREASE THE LEVEL OF EFFECTIVE DEMAND AND VICE VERSA. [lD THE EFFECTIVE DEMAND IS INVERSELY RELATED TO THE MARGINAL PROPENSITY TO SAVE CA]. ANY INCREASE IN MARGINAL PROPENSITY TO SAVE [A] WILL DECREASE THE LEVEL OF EFFECTIVE DEMAND AND VICE VERSA. THE SUPPLY SIDE OF THE ECONOMY IN THE DOMAR MODEL IS SHOWN THROUGH THE RELATION. Ys-K


  18. This relation tells us that stefdy growth is possible when investment over a period of time equals the product of saving-income ratio, capital productivity and capital stock.


  19. THE DEMAND AND THE SUPPLY EQUATION IN THE INCREMENTAL FORM CAN BE WRITTEN AS FOLLOWS: THE DEMAND SIDE IS: BUT THE INCREMENT HAS NOT BEEN SHOWN INA BECAUSE ITISA CONSTANT IN TERMS OF THE ASSUMPTIONS. SINCE 1/A IS NOTHING BUT A ANDI LEADS TO AK, WE CAN WRITE THE SUPPLY RELATION AS FOLLOWS:


  20. EQUATION (3) EXPLAINS THAT IF STEADY GROWTH IS TO BE MAINTAINED, THE INCOME GROWTH RATE AY/Y SHOULD BE EQUAL TO THE PRODUCT OF MARGINAL PROPENSITY TO SAVE [AI AND THE PRODUCTIVITY OF CAPITAL [) IN THE WORDS OF K.K. KURIHARA "IT IS AN INCREASE IN PRODUCTIVE CAPACITY LAYs) DUE TO INCREMENT OF REAL CAPITAL [ACI WHICH MUST BE MATCHED BY AN EQUAL INCREASE IN EFFECTIVE DEMAND AY DUETO AN INCREMENT OF INVESTMENT CAD, IF A GROWING ECONOMY WITH AN EXPANDING STOCK OF CAPITAL IS TO MAINTAIN CONTINUOUS FULL-EMPLOYMENT 6


  21. DISEQUILBRIUM (i) When aror ar > a (ii) When Tor ar < " or (11) When < (1) when __ or-v-> Disequilibrium (non-steady state) prevails Under the first situation, long-term inflation would appear in the economy because the higher growth rate of income will provide greater purchasing power to the people and the productive capacity ( ) would not be able to cope with the increased level of income. The first situation of disequilibrium will, therefore, create inflation in the economy


  22. THE SECOND SITUATION, UNDER WHICH GROWTH RATE OF INCOME OR INVESTMENT IS LAGGING BEHIND THE PRODUCTIVE CAPACITY, WILL RESULT IN OVER PRODUCTION. THE REDUCED GROWTH RATE OF INCOME WILL PUT A CONSTRAINT ON THE PURCHASING POWER OF THE PEOPLE, THEREBY REDUCING THE LEVEL OF DEMAND AND RESULTING IN OVER-PRODUCTION. THIS IS THE SITUATION IN WHICH THERE WOULD BE SECULAR STAGNATION. WE HAVE THUS ARRIVED AT THE SAME CONCLUSION OF INSTABILITY OF STENDY GROWTH WHICH WE HAD DERIVED FROM THE HARROD MODEL.


  23. SUMMARY OF MAIN POINTS 1. INVESTMENT IS THE CENTRAL VARIABLE OF STABLE GROWTH AND IT PLAYS A DOUBLE ROLE, ON THE ONE HAND, IT GENERATES INCOME AND ON THE OTHER, IT CREATES PRODUCTIVE CAPACITY e 2. THE INCREASED CAPACITY ARISING FROM INVESTMENT CAN RESULT IN GREATER OUTPUT OR GREATER UNEMPLOYMENT DEPENDING ON THE BEHAVIOUR OFINCOME 3. CONDITIONS CONCERNING THE BEHAVIOUR OF INCOME CAN BE EXPRESSED IN TERMS OF GROWTH RATES LE. G, Gw ANDG AND EQUALITY BETWEEN THE THREE GROWTH RATES CAN ENSURE FULL EMPLOYMENT OF LABOUR AND FULL-UTILISATION OF CAPITAL STOCK.


  24. SUMMARY OF MAIN POINTS 4.THESE CONDITIONS, HOWEVER, SPECIFY ONLY A STEADY-STATE GROWTH. THE ACTUAL GROWTH RATE MAY DIFFER FROM THE WARRANTED GROWTH RATE IF THE ACTUAL GROWTH RATE IS GREATER THAN THE WARRANTED RATE OF GROWTH, THE ECONOMY WILL EXPERIENCE CUMULATIVE INFLATION. IF THE ACTUAL GROWTH RATE IS LESS THAN THE WARRANTED GROWTH RATE, THE ECONOMY WILL SLIDE TOWARDS CUMULATIVE INFLATION. IF THE ACTUAL GROWTH RATE IS LESS THAN THE WARRANTED GROWTH RATE, THE ECONOMY WILL SLIDE TOWARDS CUMULATIVE DEFLATION


  25. 02. HARROD-DOMAR MODEL OF GROWTH IS BASED ON THE CONCEPTS OF AND THEIR EQUALITY A. POPULATION AND PRODUCTIVITY GROWTH B. INVESTMENTAND AVERAGE GROWTH RATE OFINCOME. C. ACTUAL WARRANTED AND NATURAL GROWTH RATE. D. PRODUCTIVITY GROWTH AND INVESTMENT GROWTH CODES: CAI A AND C (B) A AND D ICI C


  26. 03-SOLOW BUILT HIS MODEL AS AN ALTERNATIVE TO [A) KALDOR'S MODEL OF GROWTH [B] RANIS-FEI MODEL OF GROWTH [C) HARROD-DOMAR MODEL OF GROWTH [D) MEADE'S MODEL OF GROWTH