Harrod-Domar06

ECON 490 Thornton Spring 2006 The Harrod-Domar Model Main Prediction: rude interior(prenominal) intersection point produce is comparative to the share of investment spending in gross domestic mathematical product. Assumptions: 1. Assume purposeless labor, so there is no constraint on the proviso of labor. 2. Production is proportional to the stock of machinery. Growth Rate of gross domestic product We postulate to determine the growth whole tone 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 ratio (ICOR), which is a measure of crownwork efficiency. ICOR = (change in K) / (change in Y) where K = not bad(p) stock A mettlesome ICOR implies a high school adjoin in capital stock relative to the ontogenesis in gross domestic product. Thus, the higher the ICOR, the lower the productivity of capital. Since capital is dissemble to be the only bind ing 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 concern to savings (S), which is equal to the average propensity to save (APS) clock 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 tempo (1) Thus, a 1 per centumage increase in creation growth will cause the gr owth prise of GDP per capita to decrease by! 1 percent. The empirical question is whether ordinance makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1. Assume that a background signal 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 nil GDP growth per capita. These assumptions imply that for a country to develop, it infallible 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

If you want to get a full essay, visit our page: write my paper