Harrod-Domar06

ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main Prediction: raw domestic intersection point harvest-feast is comparative to the share of enthronement spending in gross domestic reaping. Assumptions: 1. Assume unavailing labor, so there is no constraint on the supply of labor. 2. Production is proportional to the stock of machinery. Growth Rate of gross domestic product We penury to determine the growth trample 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 balance (ICOR), which is a measure of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = chapiter stock A mettlesome ICOR implies a soaring adjoin in capital stock relative to the summation in gross domestic product. Thus, the higher the ICOR, the lower the productivity of capital. Since capital is faux to be the only binding production constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) But investment is withal mote to savings (S), which is equal to the average propensity to save (APS) quantify 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 place (1) Thus, a 1 pctage increase in tribe growth will cause the growth prescribe of GDP per capita to de crease by 1 percent. The empirical question ! is whether civil order makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a worldly concern 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 goose egg 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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