Mary Goret
4 days ago
why is it that in harrod domar model the change in savings rate has a permanent effect on the growth rate of GDP per capita while in solow model the change is temporary?
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Google Gemini AI
4 days ago
Harrod-Domar Model
- Assumes a fixed capital-output ratio (v): The amount of capital needed to produce one unit of output is constant.
- Investment (I) is the determinant of capital accumulation and economic growth.
- Growth rate of GDP per capita (g) is directly proportional to the investment rate (s) and the capital-output ratio (v):
```
g = s / v
```
Solow Model
- Assumes a diminishing marginal product of capital: As more capital is added to the production process, the additional output it produces diminishes.
- Investment (I) increases the capital stock, which leads to an initial increase in output.
- However, over time, the diminishing marginal product of capital causes the output growth rate to decline: The capital stock eventually reaches a point where it is no longer efficient to invest more.
- In the long run, growth rate of GDP per capita (g) is determined by other factors, such as technological progress and labor force growth: ``` g = f(technological progress, labor force growth) ```
Key Differences
In the Harrod-Domar model, the investment rate has a permanent effect on the growth rate of GDP per capita because it directly determines the rate of capital accumulation, which is assumed to be constant.
In the Solow model, the effect of the investment rate is temporary because the diminishing marginal product of capital eventually limits the growth rate. Over time, the economy converges to a steady state where the growth rate is determined by other factors.
Implications
- Harrod-Domar Model: Policies that increase the savings rate can lead to sustained economic growth.
- Solow Model: While investment can stimulate growth in the short term, it cannot permanently increase the long-term growth rate. Policies should focus on promoting technological progress and labor force growth.
- Assumes a fixed capital-output ratio (v): The amount of capital needed to produce one unit of output is constant.
- Investment (I) is the determinant of capital accumulation and economic growth.
- Growth rate of GDP per capita (g) is directly proportional to the investment rate (s) and the capital-output ratio (v):
```
g = s / v
```
Solow Model
- Assumes a diminishing marginal product of capital: As more capital is added to the production process, the additional output it produces diminishes.
- Investment (I) increases the capital stock, which leads to an initial increase in output.
- However, over time, the diminishing marginal product of capital causes the output growth rate to decline: The capital stock eventually reaches a point where it is no longer efficient to invest more.
- In the long run, growth rate of GDP per capita (g) is determined by other factors, such as technological progress and labor force growth: ``` g = f(technological progress, labor force growth) ```
Key Differences
In the Harrod-Domar model, the investment rate has a permanent effect on the growth rate of GDP per capita because it directly determines the rate of capital accumulation, which is assumed to be constant.
In the Solow model, the effect of the investment rate is temporary because the diminishing marginal product of capital eventually limits the growth rate. Over time, the economy converges to a steady state where the growth rate is determined by other factors.
Implications
- Harrod-Domar Model: Policies that increase the savings rate can lead to sustained economic growth.
- Solow Model: While investment can stimulate growth in the short term, it cannot permanently increase the long-term growth rate. Policies should focus on promoting technological progress and labor force growth.
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