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The Harrod - Domar Model

 Harrod Models

Introduction

The Harrod - Domar model of fiscal development are depended on the experiences of sophisticated financial system. They are chiefly addressed to a sophisticated capitalist fiscal system and effort to examine the necessities of steady growth in such financial system.

Necessities of Steady Growth

Both Harrod and Domar are involved in inventing the rate of earnings growth required for a smooth and incessant working of the financial system. Though their models differ in details, yet they arrive at like judgements.

Harrod and Domar allocate a key role to investment in the process of fiscal development. But they highlight on the twin nature of the financial system by hiking its capital stock. The former may be considered as the demand effect and the latter the supply effect of investment. Therefore, as long as net investment is taking place actual earnings and productivity will go ahead to expand.

Nevertheless that both actual earnings and productivity must expand at the same rate at which the production capacity of the capital stock is enlarging. Or otherwise, any deviation among the two will tend to surpass of the inactive capacity, thus forcing entrepreneurs to restrain their investment outlay.

Postulations

The models constructed by Harrod and Domar depend on the following postulations.

  1. There is a nominal full employment symmetry level of earnings
  1. The government interference is nor present
  1. These models function in a closed fiscal system where there is no overseas trade
  1. There are no gaps in regulation among investment and creation of productive capacity
  1. The average inclination to save parities to the marginal inclination to save
  1. The marginal inclination to save remains invariable
  1. The capital co-efficient i.e. the ratio of capital stock to earnings is presumed to be fixed
  1. Saving and investment associate to the earnings of the same year
  1. There is no depreciation of capital goods which are presumed to posses infinite life
  1. The general price level is invariable i.e. the money earnings and actual earnings are the same
  1. There are no variations in interest rates
  1. There is a fixed proportion of capital and labour in the productive process
  1. Predefined and flowing capitals are knobbed mutually under capital
  1. There is only one type of commodity

All these postulations are not required for the economic resolution of the difficulty however they serve the intention of abridging the scrutiny.

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