Examine the dynamic properties of the Harrod-Domar growth model. Which of the following equations correctly represents the equilibrium condition for steady-state growth in this framework?

💡 Solution & Explanation

The Harrod-Domar growth model posits that the rate of economic growth depends directly on the national savings rate and inversely on the capital-output ratio, expressed mathematically as g equals s divided by v. In this formulation, s represents the fraction of total income saved, and v denotes the incremental capital-output ratio required to produce a unit of output. The model highlights the knife-edge equilibrium problem, suggesting that capitalist economies lack inherent mechanisms to achieve steady-state warranted growth automatically. Robert Solow later introduced variable capital-labour ratios to overcome the rigidities of this model.