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Harrod–Domar Formula for Two-Sector Growth Models

Author

Listed:
  • Basanta K. Pradhan

    (Indira Gandhi Institute of Development Research (IGIDR))

  • V. K. Chetty

    (Department of Family Medicine, Boston University)

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.

Suggested Citation

  • Basanta K. Pradhan & V. K. Chetty, 2024. "Harrod–Domar Formula for Two-Sector Growth Models," India Studies in Business and Economics,, Springer.
    • Handle: RePEc:spr:isbchp:978-981-97-6753-3_4
    DOI: 10.1007/978-981-97-6753-3_4
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    More about this item

    Keywords

    E10; E22; O41;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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