Economics • Economic BasicsHard
In the study of economic growth models, what is the primary distinction between the Harrod-Domar model and the Solow-Swan model regarding factor substitutability?
A. The Harrod-Domar model assumes fixed capital-output ratios with no factor substitutability, whereas the Solow-Swan model allows variable factor proportions and capital-labor substitutability✓ Correct Answer
B. The Harrod-Domar model incorporates technological progress explicitly, while the Solow-Swan model relies entirely on foreign direct investment
C. The Harrod-Domar model applies only to socialist economies, whereas the Solow-Swan model applies strictly to agrarian societies
D. The Harrod-Domar model assumes constant returns to scale with variable labor supply, while the Solow-Swan model assumes decreasing returns to scale
💡 Solution & Explanation
The Harrod-Domar model relies on fixed technological coefficients where capital and labor must be combined in strict fixed proportions, leading to knife-edge equilibrium stability problems. Conversely, the neoclassical Solow-Swan model introduces a production function with smooth, continuous substitutability between capital and labor inputs, allowing adjustments through relative factor prices. Technological change in the Solow model is modeled as exogenous labor-augmenting progress.
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