Harrod-Domar Growth Model

Harrod-Domar Growth Model suggests that the economy’s rate of growth depends on:

• The level of national saving (S)
• The productivity of capital investment (this is known as the capital-output ratio)
• If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it
• will not get as much value of output for the same amount of capital.

As per this model, Rate of growth of GDP = Savings ratio / capital-output ratio

This implies if the savings rate is 10% and the capital-output ratio is 2, then a country would grow at 5% per year.  Based on the model, therefore, the rate of growth in an economy can be increased in one of two ways:

• Increased level of savings in the economy (i.e. gross national savings as a % of GDP)
• Reducing the capital-output ratio (i.e. increasing the quality/productivity of capital inputs)

Source: NCERT