Q82+-+Development

82. Using the Harrod-Domar growth model, explain how a country can increase its rate of economic growth.

There are several things that a country can do to increase its rate of economics growth referring to the Harrod-Domar Model. For starters if the savings in a economy increase then the HD Model (Harrod-Domar Model) will tell us that this will lead to an increase in investment. The increase in investment represents a greater stock of capital, which in turn should lead to greater output in the economy and greater income. Now if income increases then a proportion of it will be saved thus creating a circular motion in the HD Growth Model. the model is also based on a simple calculation, it states that the rate of growth of GDP is determined by the national savings ratio and the ratio of capital output in the economy. This all seems extremely simple and that if a developing country wants to increase there growth all they need to do is increase savings. However for developing countries most of them have very low marginal propensities to save, as people spend the vast majority of their low incomes on consumption. Furthermore, if they do have spare income they often spend it on assets, such has a plot of land or small car, and in very small cases, savings are sent out of the country in the form of capital flight due to the fact that saving in there own country is risky. The combination of high consumption, poor financial infrastructure and capital flight makes it extremely difficult to increase the level of savings in a country.