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week 5 Growth and development : Roy F. Harrod (1900-1978) and Evsey Domar…
week 5 Growth and development : Roy F. Harrod (1900-1978) and Evsey Domar (1914-1978)
Intro
Economic growth
: increase in real output (GDP)
--> Harrod-Domar model
Economic development:
process to increase real GDP per capita
--> Schumpeter
Since 1945 increase in research on growth and development:
Industrially advanced countries aim to enhance growth rates
Some poor countries became developing/emerging countries
Economic growth varies across nations
Collapse Socialism in Eastern Europe and S.U.
Increasing importance of standard of living
Harrod-Domar Growth model -1
Theory fits Keynesian framework
Main features of model:
Increased consumption arises from increased income
Balanced growth = income growth at which full employment of
resources is maintained over time
--> Economy must grow to maintain full employment
Net investment spending increases capital stock, and raises potential income level
Model: Economic growth through saving and investment, which increases capital stock and hence national product.
1947 by Harrod at U of London
1947 by Domar in AER
Harrod-Domar Growth model -2
Economic policy:
Development countries
Growth can be achieved via increased savings/investment
Unstable economy:
Investment growth < productive capacity growth economy
recedes
Investment growth > productive capacity growth demand- pull inflation
Joseph Schumpeter: Creative destruction -1
Without innovations, static equilibrium No further accumulation of wealth
Innovations cause dynamic process of economic development
Theoretical system to explain business cycles and theory of economic development:
Innovations: changes in the methods of supplying commodities --> E.g. new goods, new production methods, new markets, new
organizational structure, etc.
Entrepreneurs: introduces innovations
--> Rely on credit