Midterm flashcards
What does the Harrod Domar model emphasise?
It emphasises that growth is driven by savings and investment.
What is the growth equation in the Harrod-Domar model?
g= s/v - d
v = capital-output ratio
What is the capital-output ratio (v)?
It measures how much capital is needed to produce one unit of output.
What is the Incremental Capital-Output Ratio (ICOR)?
ICOR measures how efficiently investment translates into economic growth.
What does a low ICOR mean?
Investment is efficient—a small capital increase leads to high output growth.
What does a high ICOR mean?
Investment is inefficient—a large capital increase is needed for small output growth.
What are the policy implications of the Harrod-Domar model?
Policymakers should:
Encourage higher savings rates.
Strengthen financial institutions.
Implement fiscal incentives for investment.
What are the main limitations of the Harrod-Domar model?
Assumes a fixed capital-labor ratio.
Ignores diminishing returns to capital.
Overlooks institutions, technology, and inefficiencies.
What is capital deepening?
An increase in capital per worker, leading to higher productivity and output per worker.
What is capital widening?
Increasing total capital stock just enough to keep pace with population growth and depreciation.
What factors help a poor country catch up (conditional convergence)?
High savings & investment rates
Stable population growth
Strong institutions
Favorable trade policies
What is the first stage of Rostow’s model?
Traditional Society – Low output, subsistence agriculture, little technology.
What is the second stage of Rostow’s model?
Preconditions for Take-off – Centralized political authority, innovation, increasing savings and investment.
What is the third stage of Rostow’s model?
Take-off – Rapid growth in agriculture & industry, reinvestment of profits.
What is the fourth stage of Rostow’s model?
Drive to Maturity – Economic output grows faster than population, trade diversification.
What is the final stage of Rostow’s model?
High-Mass Consumption – High incomes, shift toward services and skilled jobs.
What are the criticisms of Rostow’s model?
Assumes all countries follow the same path.
Ignores colonial history & institutions.
Overlooks inequality, political instability, and cultural differences.
What is extensive growth?
Growth by adding more resources (land, labor, capital).
What is intensive growth?
Growth by increasing productivity through technology and efficiency.
How do governments support extensive growth?
Control key industries
Subsidize firms
Create state-owned enterprises
How do governments support intensive growth?
Support private sector innovation
Invest in infrastructure
Develop human capital (education, skills)
