Harrod–Domar Formula for Two-Sector Growth Models

Basanta K. Pradhan () and V. K. Chetty
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Basanta K. Pradhan: Indira Gandhi Institute of Development Research (IGIDR)
V. K. Chetty: Department of Family Medicine, Boston University

A chapter in Practical Economic Analysis and Computation, 2024, pp 55-70 from Springer

Abstract: Abstract In this paper, the much-celebrated Harrod–Domar model is extended to include a non-consumable capital good. Here, the growth rate of capital is directly proportional to the saving rate and inversely proportional to the weighted harmonic mean of capital-output ratios of the two sectors. Moreover, our formula includes differential prices for the two goods. Further, here, besides flexible prices, capital-output ratio can be made a variable, more like the Solow model, for the consumer goods sector helping to balance savings and investments avoiding the famed knife-edge problem. As opposed to Piketty’s neoclassical critiques, our model can provide explanations for possible direct relationships between wealth-income ratios on one side, and interest rate and rent on the other, and help to confirm the possibilities of his well-known empirical observations.

Keywords: E10; E22; O41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-981-97-6753-3_4

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DOI: 10.1007/978-981-97-6753-3_4

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