Question

According to the Harrod-Domar model, if the capital-output ratio in a country is high, that country will grow faster.

TRUE OR FALSE

Answer 1

According to Harrod Domar Model,if tge capital output ratio in a country is high,tgat coubtry will grow faster...this statement is false..the following explanation will help to understand why???

It is false..the rate of growth of the econony can be increased when-------reducibg the capital output ratio ie increasing the quality and productivity of capital inputs.

Basic Harrid Domar Model states-

Rate of growth of GDP= Saving ratio/ capital output ratio

With the following numerical examples it can be proved that low capital output ratio leads to country's growth.

1- if the saving rate is 10% and capital output ratio is 2,tgen country growth will be 5% per year.

2- if saving rate is 20% and capital output ratio is 1.5,then the country growth will be 13.3% per year.

3- if saving rate is 8% and capital output ratio is 4% then country growth rate will be 2% per year.

Therefore, it is proved that keeping capital output ratio will result in more country's growth and keeping the saving rate high