Question

Answer in 7-10 sentences.

What are the assumptions underlying the different growth models? How do these assumptions lead to different policy prescriptions for promoting economic growth from the Harrod-Domar, Solow and endogenous growth models?

Answer 1

Ans. In general we found a similarity in the nature of assumptions in different growth model,though assumptions lying in the various growth models are different.

Assumtions of Harrod-Domar growth model:

1. Constant returns to scale holds.

2. The overall effect of technical progress is neutral.

3. The capital output and labour ouput ratios are assumed to be constant.

4. Initial full employment level of income and has already been achieved.

5. Absence of government interference and foreign aid.

6. The marginal and average propensity to save are equal.

7. There are no lags in adjustment.

8. The economic system is closed.w

As we know, Harrod-Domar model opined about steady growth of the economy, and it is the main objective of the model where investment generates income on one hand and creates productive capacity on the other. H-D model showed that the behaviour of income is expressed in terms of growth rates i.e. G, Gw and Gn and the equality between these growth rates can ensure full employment of labour and full utilization of capital stock. The model primarily designed to explain the secular stagnation which was considerd a threat to the developed capitalist economies. At the same time , the problem of underdeveloped economies is not in the stability growth but growth itself, hence the model have laid down the requirements of steady growth which are inadequate to explain the problem of accelerating the rate of growth in these countries. The model emphasised to hold saving and investment equal to maintain steady growth of the economy and ruled out the role of technical progress in growth of the economy.

Assumptions underlying in the Solow gowth model:

1. The production takes place according to the linear homogenous production function or first degree of the firm; Y= F( K,L).

2. The relationship between the behaviour of savings and investment is in relation to changes in output.

3. The growth rate of labour force is exogenously determined.

4. Full employment in the economy.

5. The two factors of production K and L are paid according to their productivities.

6. Labour and capital are substitutable.

7. Investment is not of depriciation and replacement charges.

8. Technical progress does not influence the productivity and efficiency of labour.

Following these assumptions Prof. Solow tries to show that with varialble technical coe-efficients,capital-output ratio will tend to adjust itself through time towards the direction of equlibrium ratio. If, the K-L ratio is more, capital and output will grow more slowly than labour force and vice-versa. To achieved sustained gowth , it is necessary that the investment should increse at such a rate that capital and labour grow proptionately i.e. capital labour ratio is maintained. The main purpose of Prof. Solow was to examine what might be called the trightrope view of economic growth and see where more flexible assumptions aboutproduction would lead to a simple model.

Unlike the neo-classical growth models, Endogenous growth model presumed the role of technical progress and and denied the diminishing return of investment. The model described that it is the investment in human capital who generated the technology and lead to growth of the economy.