topic: Harrod-Domar Growth Model

question:

Using the concept of the Harrod- Domar model, explain the barriers to growth that may be faced by developing countries, such as the Philippines.

context:

The Harrod- Domar models attempt to analyse the requirement of a steady growth in the advanced economies. They are interested in discovering the rate of income growth necessary for a smooth working of an economy and as such, believed that investment plays a key role in the process of economic growth. Investment according to the models is divided into two, based on its ability to:

(a) create income, which is the demand effect of investment and

(b) augmenting the productive capacity of the economy by increasing capital stock, this is the supply effect of investment. Expansion of net investment would result in increase in real income and output in the economy and if this expansion is stopped, income and employment will fall, thereby moving the economy off the equilibrium path of steady growth. For net investment to grow however, the real income is required to also grow continuously at a rate sufficient enough to ensure capacity use of growing stock of capital. The real income growth rate required here is called the full capacity growth rate or the warranted rate of growth.

Harrod-Domar models are models developed independently by Sir Roy Harrod and Evsey Domar. The models explain economy growth rate in terms of level of saving and productivity of capital. The Harrod -Domar growth model is based on the experiences of advanced capitalist countries and is interested in knowing the rate of income growth that would bring about smooth and sustained growth of the economy. The model has it that growth depends on the quantity of labour and capital, noting that more investment leads to capital accumulation which brings about the growth in an economy. The model's implication for the less developed country is that because labour is in excess supply and physical capital is not, the LDC's do not have sufficient average incomes to enable high rates of saving which the model believes is necessary for the accumulation of capital stock. Therefore these countries have low rate of investment caused by low savings rate. For economic growth to be achieved in these countries policies geared towards increasing investment through increased savings should be pursued and also the savings can be used by policy makers to correct inflation or deflation as the case may be.