Question

1. A country’s national saving is 20% of its national income and it needs $4 worth of capital for producing $1 worth of goods and services on the average. The economic planners want the country to grow at the rate of 10% per annum and expect that there will be no shortage of labor in the growth process. Is this growth rate consistent with what you have learned from the Harrod Domar Model? If not, how can the planners make a plan to achieve a 10% growth rate?

Answer 1

Answer: No. The growth rate inconsistent with what was learned from the Harrod Domar Model.

Explanation:

The Harrod–Domar model is a model of economic growth that is used to explain the growth rate of an economy in terms of the level of capital and saving. The Harrod-Domar models assumes that a full-employment level of income exist and that there is no government interference in the economy.

Based on the question, the growth rate will be: = 20% ÷ 4= 5%.

To achieve a 10 % growth rate in the economy, the savings must either rise to 40% or capital output ratio drop to 2. For example, when growth rate rises to 40%, this will be= 40% ÷ 4 = 10%.