2257 Words10 Pages

2.2.3 Growth Theories

Under the growth theories some theories of growth and growth models will be reviewed;

i) The Harrod-Domar Growth Model

In economic literature, this model is called capital only model. Harrod and Domar (1948) took over from Rostow, because Rostow had some unanswered questions. The model stated that saving is a certain proportion of national income and net investment is defined as the change in capital stock (K). The model further assumes that there is some direct relationship between the size of the capital stock, (K), and total GNP, (Y). This follows that any addition to the capital stock in the form of new investment will bring about corresponding increase in the flow of national output, GNP. This relationship is known in economics as the capital-output ratio. If the capital-output ratio is defined as k and assume further that the national savings ratio, s, is a fixed proportion of national output (e.g. 6%) and that total new investment is determined by the level of total savings, we can construct the following simple model of economic growth Balami (2006).

Savings (S) is some proportion, S, of national income (Y) such that we have the simple equation

S = SY …………………………………………………………………………… (2.1)

Net investment (I) is defined as the change in the capital stock, K, and can be represented by ΔK such that

I = ΔK ………………………………………………………………………….. (2.2)

But because the total capital stock, K, bears a direct relationship to total national income or output, Y, as

Under the growth theories some theories of growth and growth models will be reviewed;

i) The Harrod-Domar Growth Model

In economic literature, this model is called capital only model. Harrod and Domar (1948) took over from Rostow, because Rostow had some unanswered questions. The model stated that saving is a certain proportion of national income and net investment is defined as the change in capital stock (K). The model further assumes that there is some direct relationship between the size of the capital stock, (K), and total GNP, (Y). This follows that any addition to the capital stock in the form of new investment will bring about corresponding increase in the flow of national output, GNP. This relationship is known in economics as the capital-output ratio. If the capital-output ratio is defined as k and assume further that the national savings ratio, s, is a fixed proportion of national output (e.g. 6%) and that total new investment is determined by the level of total savings, we can construct the following simple model of economic growth Balami (2006).

Savings (S) is some proportion, S, of national income (Y) such that we have the simple equation

S = SY …………………………………………………………………………… (2.1)

Net investment (I) is defined as the change in the capital stock, K, and can be represented by ΔK such that

I = ΔK ………………………………………………………………………….. (2.2)

But because the total capital stock, K, bears a direct relationship to total national income or output, Y, as

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