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Kaldor and Harrod-Domar Growth Models
Economic growth models help explain how economies expand over time. Nicholas Kaldor and the Harrod-Domar model offer two different approaches to understanding growth—one focusing on distributional dynamics and the other on investment-driven instability.
1️⃣ The Harrod-Domar Growth Model
The Harrod-Domar model (developed by Roy Harrod and Evsey Domar in the 1930s-40s) explains how investment, savings, and capital accumulation drive economic growth.
📌 Key Assumptions
✔ Fixed capital-output ratio → More capital investment leads to proportionate increases in output.
✔ Constant savings rate → A portion of income is saved and reinvested.
✔ No diminishing returns to capital → Assumes capital is the key driver of growth.
✔ No technological progress → Growth depends only on investment.
📌 Basic Growth Equation
g=svg = \frac{s}{v}
where:
✔ g = Growth rate of GDP
✔ s = Savings rate
✔ v = Capital-output ratio (efficiency of investment)
📌 Key Insights
✔ Higher savings lead to higher growth: If people save more, more funds are available for investment, leading to faster growth.
✔ Lower capital-output ratio leads to faster growth: If a country uses capital more efficiently, it grows faster.
✔ Risk of instability: Growth depends entirely on investment, making the model prone to boom-bust cycles.
📌 Limitation: The model assumes no technological progress and does not explain how economies adjust when growth diverges from its ideal path.
2️⃣ Kaldor’s Growth Model
Nicholas Kaldor (1950s-60s) was a post-Keynesian economist who emphasized the role of income distribution, technological progress, and demand in economic growth.
📌 Key Features of Kaldor’s Model
✔ Endogenous growth → Unlike Harrod-Domar, Kaldor’s model incorporates technological progress and productivity improvements.
✔ Role of income distribution → Higher wages lead to higher demand, while profits drive investment and growth.
✔ Investment-driven productivity → More capital accumulation leads to higher labor productivity.
📌 Kaldor’s Growth Equations
Kaldor’s model explains growth using three key variables:
1️⃣ Savings by workers (Sw) and capitalists (Sc)
2️⃣ Profit rate (r)
3️⃣ Capital-output ratio (v) g=scrvg = \frac{s_c r}{v}
where:
✔ s_c = Savings rate of capitalists
✔ r = Profit rate
✔ v = Capital-output ratio
📌 Key Insights from Kaldor’s Model
✔ Profit-driven growth → Higher profits encourage more investment, leading to growth.
✔ No fixed capital-output ratio → Investment affects productivity, leading to increasing returns.
✔ Wages vs. profits → The distribution of income between wages and profits affects growth.
📌 Limitation: The model assumes that investment automatically leads to higher productivity, which may not always be true.
3️⃣ Harrod-Domar vs. Kaldor: A Comparison
| Feature | Harrod-Domar Model 📊 | Kaldor’s Model 📈 |
|---|---|---|
| Growth Driver | Investment & savings | Profits, demand & productivity |
| Stability | Prone to instability (boom & bust cycles) | More stable (due to increasing returns) |
| Role of Technology | Not considered | Endogenous (growth leads to tech improvements) |
| Role of Income Distribution | Not considered | Important (wage-profit relationship affects growth) |
| Policy Implications | Increase savings & investment | Encourage demand, innovation & fair income distribution |
4️⃣ Conclusion: Why Do These Models Matter?
✔ The Harrod-Domar model highlights the role of investment and savings but ignores technological progress.
✔ Kaldor’s model is more realistic because it includes productivity growth, demand, and income distribution.
✔ Both models have influenced modern growth theories, including endogenous growth models like those of Romer and Lucas.