Harrod-Domar Model
The Harrod-Domar model is an early economics model of national production.
Contents
Formulation
Assume that production is a Cobb-Douglas function of capital investment: Y = f(K)
Also assume that the marginal product of capital is constant: expressed as either...
dY/dK = c
Y = cK
Investment into capital over any period (ΔK) is composed of new savings from prior production (s saving rate; sY) less a depreciation term (δ depreciation rate; δK).
It follows that the growth rate of production is equal to sc - δ.
History
This model was formulated first in Domar's Capital Expansion, Rate of Growth, and Employment.
It has been implemented as a predictive model for how much investment is required in order to achieve a target GDP growth rate.
This model was a foundation of the Solow-Swan model.