The Harrod-Domar Theory: Theories Of Economic Growth
Countries have shadowed economic growth by utilizing several strategies nonetheless their beliefs, social and political systems and these have varied recurrently according to various economic conditions and scenarios.
The world has viewed all sorts of models and research on economic policies, which have been planned to explain and some others even predict economic growth. The neoclassical theory of growth has its roots in the Harrod-Domar model that offers to explain the connection between investments, employment and growth rate in an economy with stationary growth.
Production capacity, according to these two economists was proportional to the stock of capital.
Calling for his forefathers’ model as a preliminary point, Robert Solow (1956) contributed to the development of the economic thought by improving the robustness of the expectations. He centred his thought on the growth of capital formation1 and also anticipated that production was an outcome of capital and labour, as well as technology. He
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In recent years, conditional convergence, a concept derived from these models is extensively used. This empirical property is based on the assumption of diminishing returns to capital, therefore economies with relatively low capital per worker rates tend to grow faster due to higher rates of return. As many authors had stipulated, the Solow model is a comprehensive theory of growth that provides the correct answers to the enquiries it is devised to discourse. But when it comes to understand the determinants of saving, population growth, and worldwide technological change, variables that are treated as exogenous in the Solow model, neoclassical growth models fail in giving an explanation on them (Mankiw et al, 1992; McCallum,
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