Interactive modelAdvanced Macro & Growthadvanced

Harrod-Domar Growth Model

The knife-edge predecessor to Solow: growth from the saving rate and capital-output ratio.

The Harrod-Domar Growth Model model, in writing

Definition

The pre-Solow growth model: with a fixed capital-output ratio, growth equals the saving rate divided by that ratio, a knife-edge with no self-correction.

g = s / v (saving rate over capital-output ratio)

The intuition

If machines and output are locked in fixed proportions, saving mechanically buys growth, but any mismatch between warranted and actual growth spirals rather than heals. Solow's diminishing returns replaced the knife-edge with a stable steady state.

Exam tip

Use it to explain why 'financing-gap' aid models failed: v isn't constant and saving isn't destiny.

Harrod-Domar Growth Model · interactive economics model · Graphl