Question

Discuss the harrod domar growth model. Do you think that the model is useful in shedding light to the current economic problems faced by Pakistan?

Answer 1

The Harrod-Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. This model of economic growth has following main assumptions: a) Production of economy is a function of stock of capital in economy. b) We assume that there is constant return to scale. c) We assume that average and propensities to save also remain same. d) Change in capital stock is measured by the difference of total investment and total depreciation in economy. e) The product of the saving rate and total output equals to savings which equals to investment.

According to the model there are three concepts of growth: ? Warranted growth ? Natural growth ? Actual growth.

Growth rate of Pakistan remained near about 5 percent per annum in entire history. With this rate of economic growth, Pakistan lags behind in major social or economic indicators from many other countries of the world. The growth rate of Pakistan has remained incapable to digest the growing population and it has also unable to absorb the increasing labor force. As a result, the income distribution has become more unequal and there is prevailing high inequality among the human beings. During 1990s, the growth rate remained very low because of Structural Adjustment Program (SAP), but growth rate again started to move upward during 2000s.

Foreign aid and its effectiveness is highly debated issue in current scenario of Pakistan. Most of the developing countries have inadequate level of savings and foreign aid can supplement domestic savings for their investment and further to enhance economic growth. When there is volatility in foreign inflows that create uncertainity and discontinuity in our socio-economic and other projects those leads toward economic growth.