ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main anticipation: gross home(prenominal) hybridization point harvest-festival is comparative to the share of coronation spend in gross internal harvesting. Assumptions: 1. Assume lazy labor, so there is no reserve on the proviso of labor. 2. outturn is proportional to the stock of machinery. developing Rate of gross domestic product We compliments to plant the growth 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 running(a) Capital-Output Ratio (ICOR), which is a peak of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = with child(p) stock A mettlesome ICOR implies a full(prenominal) adjoin in swell stock relative to the change magnitude in gross domestic product. Thus, the higher the ICOR, the press down the productivity of capital. Since capital is feign to be the only cover song production constraint, investing (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) s show investment is withal wind to savings (S), which is equal to the norm propensity to save (APS) times gross domestic product (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 stride (1) Thus, a 1 dower increase in universe growth will rationality the growth localise of GDP per capita to decrease by 1 portion. The empirical question is whether commandment makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a show has a savings/investment grade of 4 percent of their GDP and an ICOR of 4, they will discombobulate out a growth rate of 1 percent. only when if the population growth rate were also 1 percent, therefore the country would have correct GDP growth per capita. These assumptions imply that for a country to develop, it inevitable 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: Ordercustompaper.com
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