Named after English economist Roy Harrod (1900-1978) and Polish-born American economist Evsey Domar (1914-1997), Harrod-Domar growth model postulates three kinds of growth:
(1) warranted growth (the rate of output at which firms feel they have the right level of capital and do not wish to expand or decrease investment);
(2) natural rate of growth (corresponding to growth in the labor force);
(3) actual growth (resulting from a change in aggregate output).
However, there are problems between actual and natural growth and warranted and actual growth. The factors that determine actual growth (propensity to save, investment) are autonomous from those factors determining natural growth (birth control, tastes of population, and so on). Disequilibrium arises in a situation in which warranted growth is different to the natural rate of growth; when equal steady growth is accompanied by full employment or a constant rate of unemployment occurs.
Also see: natural and warranted rates of growth, Solow economic growth
R F Harrod, Towards a Dynamic Economics (London, 1948);
E Domar, Essays in the Theory of Economic Growth (New York, 1957
The Harrod–Domar model is a Keynesian model of economic growth. It is used in development economics to explain an economy’s growth rate in terms of the level of saving and of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939, and Evsey Domar in 1946, although a similar model had been proposed by Gustav Cassel in 1924. The Harrod–Domar model was the precursor to the exogenous growth model.
Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution—and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.
According to the Harrod–Domar model there are three kinds of growth: warranted growth, actual growth and natural rate of growth.
Warranted growth rate is the rate of growth at which the economy does not expand indefinitely or go into recession. Actual growth is the real rate increase in a country’s GDP per year. (See also: Gross domestic product and Natural gross domestic product). Natural growth is the growth an economy requires to maintain full employment. For example, If the labor force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent