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Harrod-Domar Formula for Two Sector Growth Models

V.K. Chetty and Basanta K Pradhan ()
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Basanta K Pradhan: Institute of Economic Growth, Delhi

No 413, IEG Working Papers from Institute of Economic Growth

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

JEL-codes: E10 E22 O41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020-12
New Economics Papers: this item is included in nep-gro and nep-mac
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Published as Institute of Economic Growth, Delhi, December 2020, pages 1-22

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