WHAT ARE ECONOMIC GROWTH MODELS?

Growth models are the principle strategies used for economic growth and development in the developing countries.

ECONOMIC GROWTH MODELS

There are three economic growth models:

Harrod Domer’s Growth ModelRobert Solow’s Growth ModelKaldor’s Law

WHAT IS H.D MODEL???

“Mobilization of savings in order to generate sufficient investment to accelerate the economic growth.”

OR

“The economic mechanism by which more investment leads to more growth.”

INVESTMENT

GROWTH

CAPITAL

SAVINGS

CAPITAL OUTPUT RATIO (COR)

It means that there is a direct relationship between capital and GNP

K …….............GNP/OUTPUT

(Here k is the capital)

When capital increases the output also increases.

FURTHER CONSTRUCTION OF H.D MODEL

For further construction of this model we assume that savings are a fixed portion of the national income (N.I).

S = sY…………...(1)

(here S=savings and sY=portion saved from N.I)

CONT….

Net investments can be described as a change in capital stock and can be represented as:

I = k……….(2)

(here I=investment and k=change in capital)

According to this model COR bears a direct relationship between capital and output. So;

K/Y = k

(here K=capital, Y= income output and k=COR)

K/ Y = k

K=k Y

Savings are equal to the investments.Thus;

S = I

Now joining equ. 1,2,3. We get,

S=sy, I= K, K= k y ,S=I

sY = k Y

Y/Y = s/k

“Thus change in output is due to the change in savings and investments.”

OR

“Rate of GNP or output is determined by the savings and COR.”

FINAL VERSION OF H.D MODEL

The final version of H.D model is as follows:

Y/Y = s/k

EXPLANATION OF THE FINAL VERSION OF H.D MODEL

This final version of H.D model states that the rate of GNP/output is jointly determined by the ‘savings’ and the ‘capital output ratio’.

OR

The growth of GNP is positively related to the ‘savings’ and the ‘capital output ratio’.

Thus the H.D model shows that:

“more we can save, the faster we can grow”

OBSTACLES AND CONSTRAINTS OF H.D MODEL

H.D model has the following constraints:

Savings gap: It is usually not narrow.

Capital constraints: Capital is the main constraint in the growth of any economy.

CONT….

Investment problems: When there are capital constraints and savings gap then the investment problems also arise.