Question

what are all the differences of the solow model and Horrad Domar model?

Answer 1

Harrod Domar model:

this model links growth rate of an economy to

1) the ability of economy to save and

2) to the capital output ratio.

So as savings rate increases, growth rate increase and as capital output ratio Falls ,growth rate increase.

1) it assumes constant returns to capital

2) since no diminishing returns to scale, so no steady state exists, thus capital grows infinitely

3) production is assumed to be function of capital only, hence capital output ratio is fixed, so no role for Labor as a factor of production, hence population growth eats into per capita growth.

4) thus H-D model takes K-Y ratio as exogenous , thus don't consider the fact that increased population raises output

5) hence model assumes that labor and capital are not substituable in production process, so added population growth only reduces the per capita growth and contribute nothing via production process.

Solow model:

1) it is based on law of diminishing returns to the individual factors of production.

2) there exists a steady state due to diminishing returns to scale and hence capital does not grow indefinitely.

Steady state level is the level of per capita capital stock to which capital ,starting from any initial level ,must converge

2) it assumes capital - output ratio as an endogenous factor.

4) in solow model there exists a well defined production function that relates capital & labor to the production.

5) population growth rate contributes to the productive potential as extra labor force is absorbed into the productive activity through the changes in capital labor ratio.

6) in long run capital to labor ratio must be constant because diminishing returns to Capital creates a downward Movement in output to Capital ratio and so this low output capital ratio brings down capital growth rate in line with the labor growth rate

7) in solow model no long run growth rate of per capita output exist ,and total output growth rate = population growth rate

8) saving rate has only level effect, no growth effect, increase in saving rate oy increases long run steady state level of output.