INTEGRATED HARROD DOMAR GROWTH MODEL

THE HARROD DOMAR GROWTH MODEL STATES THAT The

growth of an economy is positively related to its savings ratio
and negatively related to the capital-output ratio. IT
MEANS THAT TO ACHIEVE A HIGHE R ECONOMIC
GROWTH A COUNTRY MUST HAVE HIGHER
SAVINGS RATIO AND LOWER CAPITAL OUTPUT
RATIO.
It implies that a higher savings rate allows for more
investment in physical capital. This investment can increase
the production of goods and services in a country, therefore
increasing growth. The capital-output ratio shows how much
capital is needed to produce a dollar’s worth of output. It
reflects the efficiency of using machines. This efficiency
means that a lower capital-output ratio leads to higher
economic growth since fewer inputs generate higher outputs.

ASSUMPTIONS OF THE MODEL

1 HIGHER SAVIGS LEADS TO HIGHER INVESTMENT.
S=I
2 HIGHER INVESTMENT LEADS TO THE HIGHER
CAPITAL STOCK. CAPITAL STOCK CAN BE IN THE
FORM OF NEW MACHINES,LAND,OFFICES ETC. IF A
COUNTRY’S ECONOMY HAS A CAPITAL OF RS 100
IN THE FORM OF MACHINES,LAND,OFFICES ETC IN
YEAR 2018.IN 2019 AN INVESTMENT OF RS 20 IS
MADE THE CAPITAL STOCK WILL CHANGE TO 120.
I=K
3 CONSTANT CAPITAL OUTPUT RATIO:- AN
ECONOMY MUST HAVE A CONSTANT CAPITAL OUT
PUT RATIO FOR HIGHER ECONOMIC GROWTH.
COR =TOTAL INVESTMENT/TOTAL INCOME
OR COR=INVESTMENT RATIO TO GDP/GROWTH
RATE
EG COR=25/5 COR MUST RAMAIN AT FIVE BUT THE
SAVINGS RATIO MUST GO UP.
C=I/Y

EQUATIONS OF THE HARROD DOMAR GROWTH

MODEL
INCREASE IN THE CAPITAL STOCK INCREASES
INCOME.
Y.R=K---------------------------------------------------1
HIGHER INVESTMENT LEADS TO HIGHER INCOME
Y.R=I-----------------------------------------------------2

YOU CAN OBTAIN THE RATE OF GROWTH BY

DIVIDING THE INVESTMENT RATIO BY CAPITAL
OUTPUT RATIO
Y=I/R----------------------------------------------------3
FINALLY WE GET OUT GROWTH EQUATION BY
DIVIDING SAVINGS BY CAPITAL OUTPUT RATIO
Y=S/R---------------------------------------------------------4