What is the Harrod-Domar model?

The Harrod-Domar is a macroeconomic theory used to measure the country's economic growth as a whole. As part of this model, the growth of the economy is calculated as a factor in capital production and an individual rate of savings. Economists rely on Harrod-Domar theory as one method of estimating long-term economic growth. Combined with other models and theories, this calculation can provide a valuable insight into the state of the economy and can help politicians develop new growth policies.

This theory dates back to the age of 30 when the British economist Sir Roy Harrod expanded earlier economic theories to develop this model. Harrod had a hard time relying on John Maynard Keynes, who is often considered one of his father's economic. Harrod was both a close friend Keynes and his biographer, as well as a fertile economist himself. At about the same time, Russian Evsey Domar came with a similar model of economic growth. Thedvě United Forces to further develop what is now known as modEl Harrod-Domar.

According to the Harrod-Dumar model, the level of national income is equal to the divided C. S represents the ratio of savings to revenue in the country, while the C represents the limit ratio of capital output. The capital output ratio is largely a scale of how productively use capital equipment. All things are the same, the Harrod-Domar assumes that the economic growth rate will always increase in proportion to the national savings level. When the economy rate decreases, the national economy will grow at a slower pace or even reduce over time.

This theory is based on the assumption that the financing of capital investments comes with money that has been stored rather than spent. By inserting more money on savings accounts and other tools, citizens make more money available for investorrrow. With these borrowed money, companies are expanding operations, buying new equipment or investing DAbout new, more productive technologies.

Harrod and Domar assumed that production was fixed and that current capital equipment could produce the same volume as future capital equipment. Later economists have improved their theory into an exogenous growth model. This model differs from the Harrod-Domar in that it realizes that every new generation of devices should benefit from increasing productivity due to technological progress.

Based on the Harrod-Domar and the theory of exogenous growth, the most effective way to expand the economy is to increase the rate of savings. Theoretically, this means that politicians should determine politicians that stimulate savings to ensure economic growth. In practice, some argue that savings are largely dependent on the level of income and income division. This means that it is very difficult to increase savings rates without major economic changes to Increade or redistribute revenues.