Harrod-Domar & Lewis growth

models!!!!!!!

By: D'Chergio
 Harrod-Domar Growth Model

Economic growth depends on three factors:

A. the saving rate

B. the capital/output ratio

C. the depreciation rate

 Main Propositions
●
Economic growth can be accelerated
by
– changing the saving rate
– improving technology.
●
Saving rates and technology can be
changed
– government interventions without
consideration to prices
 Harrod-Domar Growth Model
A Flow chart model
Depreciation Saving Rate
Rate

Ig S s
d
C
D
GDP
Capital/Output
v= K/Y or
Ratio or
a=Y/K
In Productivity

Capital
Factors Explaining the growth rate
According to Harrod-Domar model

+ s Saving rate

Rate of +
Economic g a Capital productivity
Growth

_
d Capital depreciation
Economic growth formula
According to Harrod-Domar the rate of economic growth
is defined by the formula:

g = s.a – d

that is, if s=10% and a=0.20 and d =1%, then

g=0.10*0.20 - 0.01 = 0.02 -0.01 = 0.01 = 1%

 Structural Change/dual sector
model (Lewis Model)
● It was based on the assumption that many LDCs had
dual economies with both a traditional agricultural
sector and a modern industrial sector.
● The traditional agricultural sector was assumed to be
of a subsistence nature characterised by low
productivity, low incomes, low savings and
considerable underemployment.
● The industrial sector was assumed to be
technologically advanced with high levels of
investment operating in an urban environment.
● Lewis suggested that the modern industrial sector
would attract workers from the rural areas.
● Industrial firms, whether private or publicly owned
could offer wages that would guarantee a higher
quality of life than remaining in the rural areas could
provide.
● Those people that moved away from the villages to the
towns would earn increased incomes and this crucially
according to Lewis generates more saving
 Assumptions
● Surplus labour is attracted to 30% higher
wages of industrial sector.
● Food output not affected since marginal output
is low
● Large profits in urban sector are re-invested
into new domestic capital
● Surplus labour is absorbed → upward pressure
on wages → wages become uniform
throughout the economy → rural sector shrinks
in reltaive importance.
 Criticisms
● Not all profits are re-invested
● Wages increased in urban sector during unemployment periods
● Capital-intensive technlogy does not absorb much labour
● The idea that the productivity of labour in rural areas is almost
zero may be true for certain times of the year however during
planting and harvesting the need for labour is critical to the
needs of the village.
● The assumption of a constant demand for labour from the
industrial sector is questionable. Increasing technology may be
labour saving reducing the need for labour. In addition if the
industry concerned declines again the demand for labour will
fall.