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critically examine the basic formulations of the harrod- domar model of economic growth. how does the harrod model explain the occurrence of trade cycles?
Formulations of the Harood-Domar Model of
economic growth are as follows: – (i) Investment is the central theme of the HDM. It plays a dual role. On the one
hand it generates income and on the other it creates productive capacity. (ii) The increased capacity results in greater output and greater employment,
depending on the behavior of the income. (iii) Condition regarding the behavior of income can be expressed in terms of
growth-rates i.e , G, Gw and Gn. The equality between these growth rates would
ensure full employment of labour and full utilization of capital stock. (iv) These
conditions, however, designate only a steady-line of growth. The actual growth
rate may differ iron the warranted growth rate. If the actual growth rate is
higher than the warranted rate of growth, the economy will experience
cumulative inflation. If the actual growth rate is lower than the warranted
growth rate, the economy will hurtle towards cumulative deflation. (v) The business-cycles are viewed as the deviations from the path of steady
growth. These deviations cannot go on indefinitely. There are constraints on
upper and lower limits. The full employment ceiling acts an upper limit and
autonomous investment and consumption act as a lower limit. The actual
growth-rate fluctuates between these two limits. Harrod has used his model to explain trade cycles. In the recovery phase,
because of the existence of unemployed resources, G>Gn. When full employment
is reached G = Gn. If Gw exceeds Gn…

at the full employment, slump is
inevitable. Since G had to fall below Gw, it will, for the time being, be
driven progressively downwards. Further, G itself fluctuated during the course
of the business cycle. Savings as a fraction of income, though fairly steady in
the long run, fluctuate in the short run. In the short run, savings tend to be
residual between the earning and normal consumption. Companies, also, are
likely to save large portion of their short-period increased in net receipts.
Thus, even if Gw is normally below Gn, it is likely to ride above Gn in the
later stages of advance, and, if it so happens, a vicious spiral of depression
is inevitable when full employment is reached. If Gw does not ride above Gn in
the course of advance, there would be continued pressure to advance when full
employment is reached; this would lead to inflation and consequently, sooner or
later, to a rise of Gw above Gn, resulting ultimately into a vicious spiral of
depression. Actually, G may be reduced before the employment is reached because
of immobilities, frictions, and bottlenecks and, if it so happens, depression
may come before full employment is reached. If Gw is far above Gn, G may never
rise far above Gw during the revival and the depression may result long before
full employment is reached.


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