Discuss the determinants of a country`s rate of growth in income as found in the

Question

Discuss the determinants of a country`s rate of growth in income as found in the original "Harrod-Domar" model. How was the instability problem in the HD model resolved by Solow in what is now the "standard"(neoclassical) model of growth? Use this latter model to explain how "Cemerging" countries typically experience rapid growth in the early stages of their development, why this rate slows down, and the sources of growth that may be exploited by older "developed" countries.

please help!!! and please if possible include the graphs for each answer as well. Thanks!

Explanation / Answer

a)Main Prediction: GDP growth is proportional to the share of investment spending in GDP.

Assumptions:

1. Assume unemployed labor, so there is no constraint on the supply of labor.

2. Production is proportional to the stock of machinery.

Growth Rate of GDP

We want to determine the growth rate of GDP, which is defined as:

G(Y) = (change in Y) / Y where Y = GDP

To do this, we estimate the Incremental Capital-Output Ratio (ICOR), which is a measure of

capital efficiency.

ICOR = (change in K) / (change in Y) where K = capital stock

A high ICOR implies a high increase in capital stock relative to the increase in GDP. Thus, the

higher the ICOR, the lower the productivity of capital.

Since capital is assumed to be the only binding production constraint, investment (I) in the

Harrod-Domar model is defined as the growth in capital stock.

I = (change in K)

But investment is also equal to savings (S), which is equal to the average propensity to save

(APS) times GDP (Y). Denote APS = s

I = S = APS * Y = s*Y

So,

ICOR = (s Y) / (change in Y)

Rearranging terms,

G(Y) = (change in Y) / Y = s / ICOR

b)in solow model labour growth rate in assumed to be equal to gdp growth rate = n = employment rate

c)as in emerging countries with develoment inequalities also rises and this rate slows down

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