Harrod–Domar Growth Model

1) Why growth models?

Growth models explain how an economy’s output can expand over time and what determines:

• long-run growth rate,
• stability of growth,
• roles of saving, investment, and technology.

Harrod–Domar is an early growth model emphasizing saving and capital accumulation.

2) Core assumptions (simple CUET-level)

Harrod–Domar typically assumes:

1. Fixed capital-output ratio (technology fixed): $$v = \frac{K}{Y}$$
2. A constant saving rate: $$S = sY$$
3. Investment equals saving: $$I = S$$
4. Investment adds to capital stock: $$\Delta K = I$$

(Depreciation is often ignored in the simplest form.)

3) Deriving the growth rate

From fixed capital-output ratio:

But $\Delta K = I = S = sY$.

So:

Thus the Harrod–Domar growth rate:

Where:

• $s$ = saving rate
• $v$ = capital-output ratio (how much capital needed per unit output)

Interpretation:

• Higher saving rate $s$ → higher growth.
• Higher $v$ (more capital-intensive/inefficient) → lower growth.