harrod domar model

Question 1

Harllod domar

Answer 1

Halliard domar the economic growth is determined by the level of saving and the capital output how effiecnly they use their capital.
Used to explain the low levels of development in poor countries

Question 2

explain the arrows

Answer 2

Savings ratio low, a very low income very high marginal propensity to consume - low levels off investment, poor banking system - low level of capital sock - output - so low levels of income

Question 3

Very low savings ratio is difficult

Answer 3

there is a saving gap which is presistant
Finical system is often inefficient and not effective
Research and development is underfunded
Externaly borrowing from richer countries but repayment problems

Question 4

• Developing countries find it difficult to increasesaving.

Answer 4

Increasing savings ratios may be inappropriate when you
are struggling to get enough food to eat.

Question 5

The model ignores factors such as

Answer 5

• The model ignores factors such as labour productivity, technological innovation and levels of corruption. The Harrod-Domar is at best an oversimplification of complex factors which go into economic growth.

Question 6

There are examples of countries who have experienced rapid growth rates despite a lack of savings,

Answer 6

such as Thailand.

Question 7

It assumes the existences of a reliable finance and transport system.

Answer 7

Often the problem for developing countries is a lack of investment in these areas.

Question 8

The Model explains boom and bust cycles through the importance of capital, (see accelerator theory)

Answer 8

However, in practice businesses are influenced by many things other than capital such as expectations.

Question 9

The effectiveness of foreign capital flows can vary. In the 1970s and 80s many developing economies borrowed from abroad, this led to an inflow of foreign capital however,

Answer 9

there was a lack of skilled labour to make effective use of capital. This led to very high capital-output ratios (poor productivity) and growth rates didn’t increase significantly. However, developing economies were left with high debt repayments and when interest rates rose, a large proportion of national savings was diverted to paying debt repayments.