How does the harrod model explain the occurrence of trade cycles?
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Harrod's model of economic growth
Like Domar, Harrod also examines the possibility of steady growth. He points out the nature of possible paths along with the economy might progress. Since the progress is never smooth, Harrod also indicates the difficulties which an economy might encounter in the process of steady growth.
Harrod has developed his model on the basis of three distinct concepts of rates of growth. First, there is the actual rate of growth indicated by G. It is determined by the saving ratio indicated by s and the incremental capital-output ratio indicated by C.
The second concept is the warranted rate of growth indicated by Gw. The warranted rate of growth is taken to be the rate of growth required for the full utilisation of a growing stock of capital.
If warranted rate of growth occurs, it "will leave all parties satisfied that they have produced neither more nor less than the right amount." A third concept is the natural rate of growth indicated by Gn.
Harrod defines it as the rate of growth that is determined by the current growth of the working population and the current potential for technical progress. Such a rate of growth is not determined by the wishes of people as regards saving.
Like Domar, Harrod also examines the possibility of steady growth. He points out the nature of possible paths along with the economy might progress. Since the progress is never smooth, Harrod also indicates the difficulties which an economy might encounter in the process of steady growth.
Harrod has developed his model on the basis of three distinct concepts of rates of growth. First, there is the actual rate of growth indicated by G. It is determined by the saving ratio indicated by s and the incremental capital-output ratio indicated by C.
The second concept is the warranted rate of growth indicated by Gw. The warranted rate of growth is taken to be the rate of growth required for the full utilisation of a growing stock of capital.
If warranted rate of growth occurs, it "will leave all parties satisfied that they have produced neither more nor less than the right amount." A third concept is the natural rate of growth indicated by Gn.
Harrod defines it as the rate of growth that is determined by the current growth of the working population and the current potential for technical progress. Such a rate of growth is not determined by the wishes of people as regards saving.
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