Linear stages of growth and the harrod domar growth
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LINEAR STAGES OF GROWTH AND THE HARROD-DOMAR GROWTH MODEL
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Transcript of Linear stages of growth and the harrod domar growth
LINEAR STAGES OF GROWTH AND THE HARROD-DOMAR GROWTH
MODEL
LINEAR STAGES OF GROWTH
What are the five different stages of growth?
i. Traditional society
ii. Pre-conditions for take-off
iii. Take-off
iv. The drive to maturity
v. The age of mass consumption
How does a country move through these stages? Capital accumulation
LINEAR STAGES OF GROWTH
What is the historical justifications for this model?The Marshall PlanPath of developed nations
0
10
20
30
40
50
60
70
80
90
Perc
ent
Agriculture Labor Share
HARROD-DOMAR GROWTH MODEL
𝐺𝐷𝑃
𝑛𝑒𝑡𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑟𝑎𝑡𝑒
𝑔𝑟𝑜𝑠𝑠 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑟𝑎𝑡𝑒
𝑑𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑟𝑎𝑡𝑒
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘What is the definition of net savings? Total absolute amount saved… Savings minus depreciation
HARROD-DOMAR GROWTH MODEL
Total production in the country is equal to:
What is another name for the Harrod-Domar growth model? AK model (where
is usually )𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑜𝑢𝑡𝑝𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
HARROD-DOMAR GROWTH MODEL
Total production in the country is equal to:
Why is labor not explicitly modeled? It is assumed to
not be a constraining factor.
𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑜𝑢𝑡𝑝𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
HARROD-DOMAR GROWTH MODEL
Absolute change in GDP, , can then be expressed as:
Why this outcome? We are assuming
is constant.
HARROD-DOMAR GROWTH MODEL
We assume that
¿𝑐 ∆𝑌
¿ 𝐼¿ ∆𝐾¿𝑐 ∆𝑌What does this say? Growth is a
function of the savings rate and the inverse of the capital-output ratio
𝐺𝐷𝑃 h𝑔𝑟𝑜𝑤𝑡
HARROD-DOMAR GROWTH MODEL
Result:
If you want to develop, what do you have to do?Accumulate capital!
What factor which is always mentioned as key in an industrial revolution is not determined in the model?Technological change
HARROD-DOMAR GROWTH MODEL
Result:
What can be done if domestic savings is insufficient?
How does this relate back to the Marshall Plan?
HARROD-DOMAR GROWTH MODEL
Result:
If this was the only explainer for differences in GDP and growth, what would you expect differences in savings to look like?
HARROD-DOMAR GROWTH MODEL
Result:
“Unfortunately, the mechanisms of development embodied in the theory of stages of growth did not always work.”
Why?
PROBLEMS: HARROD-DOMAR GROWTH MODEL
Show that
PROBLEMS: HARROD-DOMAR GROWTH MODEL
If , what savings rate is needed to obtain 10% GDP growth?
Where
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
If the poor save more than the rich, how would policies that benefit the rich affect growth in the model looked at above?
Think about how we can formulate this into the model….
𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑟𝑎𝑡𝑒𝑜𝑓 h𝑡 𝑒 h𝑟𝑖𝑐
𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑟𝑎𝑡𝑒𝑜𝑓 h𝑡 𝑒𝑝𝑜𝑜𝑟Lets assume depreciation is zero…
h𝑊 𝑒𝑟𝑒𝑠𝑅>𝑠𝑃
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
If the poor save more than the rich, how would policies that benefit the rich affect growth in the model looked at above?
Think about how we can formulate this into the model….
Lets assume depreciation is zero…
h𝑊 𝑒𝑟𝑒𝑠𝑅>𝑠𝑃𝑖𝑛𝑐𝑜𝑚𝑒 h𝑠 𝑎𝑟𝑒𝑜𝑓 h𝑡 𝑒 h𝑟𝑖𝑐
𝑖𝑛𝑐𝑜𝑚𝑒 h𝑠 𝑎𝑟𝑒𝑜𝑓 h𝑡 𝑒𝑝𝑜𝑜𝑟
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
If the poor save more than the rich, how would policies that benefit the rich affect growth in the model looked at above?
Think about how we can formulate this into the model….
Lets assume depreciation is zero…
h𝑊 𝑒𝑟𝑒𝑠𝑅>𝑠𝑃
𝑛𝑒𝑡 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑜𝑓 h𝑟𝑖𝑐
𝑛𝑒𝑡 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑜𝑓 𝑝𝑜𝑜𝑟
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
If we solve, we get:
How can we analyze the affect of changing income inequality?
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
Which is:
If we increase , i.e. inequality, we increase , i.e. growth…h𝑊 𝑒𝑟𝑒𝑠𝑅>𝑠𝑃¿0
𝛼𝑅𝑎𝑛𝑑∆ 𝑌𝑌h𝑎𝑣𝑒𝑎𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 h𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛𝑠 𝑖𝑝
TO THINK ABOUT: HARROD-DOMAR GROWTH MODEL
If we increase , i.e. inequality, we increase , i.e. growth…Why is this the case?
What is missing from this analysis that makes such a result possible?
HOMEWORK
Read section 3.3
