10 Harrod-Domar Growth Model Assumptions

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Learn about the  Harrod-Domar Growth Model Assumptions and how they influence economic development and growth.

Harrod-Domar Growth Model Assumptions.

Harrod and Domar is a models of long run. Both Harrod and Domar are interested in discovering the rate of income growth necessary for a smooth and uninterrupted working of the economy. Though their models differ in details, yet they arrive at similar conclusions:

  1. The models constructed by Harrod and Domar are based on the following assumptions.
  2. There is an initial full employment equilibrium level of income.
  3. There is the absence of government interference.
  4. These models operate in a closed economy which has no foreign trade.
  5. There are no lags in adjustments between investment and creation of productive capacity.
  6. The average propensity to save is equal to the marginal propensity to save.
  7. The marginal propensity to save remains constant.
  8. The capital coefficient, i.e. the ratio of capital stock to income is assumed to be fixed.
  9. There is no depreciation of capital goods which are assumed to possess infinite life.
  10. Saving and investment relate to the income of the same year.
  11. The general price level is constant, /.e, the money income and the real income are the same.
  12. There are no changes in interest rates.
  13. There is a fixed proportion of capital and labour in the production process.
  14. Fixed and circulating capital are lumped together under capital.

Lastly, there is only one type of product. Domar in this model wishes to find that rate of change in investment (AI) whereby the rate of increase in Nl could become equal to the rate of increase in productive capacity. This would guarantee the maintenance of yf. He forges a link between aggregate supply and aggregate demand through investment.

Increase in Productive Capacity:

Domar emphasis the supply side like this. Let the annual rate of investment be I, and the annual productive capacity per dollar of newly created capital be equal on the average to S. Thus the productive capacity of i dollar invested will be l.s dollars per year.

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