Harrod-Domar model

The Harrod-Domar model explains how the income of today affects the income of tomorrow in a simple equation where the data entries are minimal. Although the Harrod-Domar model is easy to use, there are a few limitations. The economy only enters equilibrium when there is a full employment of both labor and capital. Using the fixed-coefficient production function, the capital-labor ratio must remain constant. On a graph, with capital on the y-axis and labor on …

…grow faster than rich countries. With increasing returns to scale, diminishing returns to capital do not necessarily set in. Growth rates do not slow or plateau, implying the economy does not reach a steady state; therefore, continued growth in countries can be explained without the variable technological change, present in the Solow model. Regardless of the implications in the Solow model, it still "represents the vast majority of variation in economic growth across countries" (Perkins, 80).