Question

1) State and describe the Harrod-Domar model of economic growth. Discuss the character of the Lewis model and how that model forms a response to one of the major criticisms of the H-D presentation. Use a graphical presentation in your answer.

Answer 1

Harrod Domar Model Of Economic Growth :

Introduction-

It is a Keynesian idealistic model, which was initially propounded by Roy F. Harrod in 1939 and than by Evsey Domar in 1946 ,it is somewhere from the exogenous growth models outlook

Assumptions-

1. Full employment exists
2. No government intervention
3. Marginal and average propensity are equal
4. No lags in adjustment
5. Saving and capital coefficient are constant
6. Depreciation is cost of replacement

Features -

​​​​It said Economic growth depends upon

1. Level of saving - he believed that higher the saving higher will be the investment
2. Capital output ratio - for higher economic growth this ratio needs to be low so that investment can be efficient

Concepts -

1. Warranted growth rate - this is when all saving is absorbed in investment
2. Natural growth rate - that growth rate which is needed to maintain full employment

Graphical presentation -

as per graph

• S(Y) - saving corresponding to various income levels at I0,I1,I2 ,which are different levels of investment
• Y0P0 and Y1P1 - capital productivity at various investment levels
• Rise in income - on productivity of capital that is measures by slope of Y0P0 , higher the slope higher the productivity
• That is if initially the level of income is OY1 so saving is Y0S1,which becomes future investment and raise income level to OY2 .
• Role of economic growth = saving ÷ capital output

Importance-

like a cycle Higher Capital stock -> higher economic growth -> more saving -> more investment than again more capital stock

Criticism -

1. Did not support much in developing countries as for them to rise level of saving was a big task
2. It is short term model
3. Without saving nations like Thailand has achieved growth
4. Exaggerate importance of capital to have growth
5. Many times more capital stock can have less returns
6. Ignores labor productivity and technological innovation
7. LEWIS MODEL : as it has no savings ,here profits earned from surplus labor is been reinvested in business to increase productivity and to have more outcomes that is because of LESSER WAGE . CHARACTER - a) moving from agriculture to modern society i.e. a transition ,b)growth is when labor moves from low productivity agriculture to high productive industrial sector ,c) with surplus labor in agriculture ,the industry does not raise its wage and from those profits it gets investment and earn more d) this happens till surplus labor is absorbed. CRITISM - To have more productivity cycle does not go on and on . There needs a shift from less productive to more

Conclusion:

Both are growth models wherein Lewis has widen the horizon to actually achieve growth. As labor itself is not just improving niether investing in same picture helps but the place of work also effects and also there is an upliftment. Not just mere growth , upliftment is from being in rural before than getting urbanised