Compare and contrast Harrod growth model and domar growth model. What are similarities?
Both the Harrod and Domar growth models are concerned with analyzing the factors that lead to economic growth and development. They both involve the use of mathematical models to explain the relationships between different variables in an economy.
However, there are significant differences between the two models:
Harrod Growth Model:
1. Proposes a dynamic model of economic growth based on the relationship between savings, investment, and output.
2. Emphasizes the role of effective demand (the level of aggregate demand relative to potential output) in determining the rate of growth.
3. Assumes that the economy will tend towards a balanced growth path, where the rate of growth is consistent with full employment of resources.
4. Highlights the importance of maintaining high levels of investment to sustain economic growth.
Domar Growth Model:
1. Focuses on the relationship between savings and investment as determinants of economic growth.
2. Proposes a static model of economic growth, where the rate of growth is determined by the ratio of investment to national income.
3. Emphasizes the role of the capital-output ratio in determining the rate of growth.
4. Suggests that maintaining a stable capital-output ratio is essential for sustaining economic growth in the long run.
Overall, the main similarity between the two models is that they both seek to explain the mechanisms of economic growth and development. However, the Harrod model is more dynamic and forward-looking, whereas the Domar model is more static and concerned with the relationships between savings, investment, and output.