Economics • Economic BasicsHard
Analyze the structural assumptions of the Harrod-Domar growth model in development economics. What role does the capital-output ratio play in determining the equilibrium growth rate?
A. It shares an inverse relationship with the required savings rate
B. It determines the rate at which invested capital generates output✓ Correct Answer
C. It measures labor productivity growth independently of technology
D. It fluctuates automatically to ensure full employment equilibrium
💡 Solution & Explanation
The capital-output ratio measures the amount of capital investment required to produce a given unit of output, serving as a critical determinant in the Harrod-Domar formula where growth equals the savings rate divided by the capital-output ratio. This model assumes fixed coefficients of production without factor substitutability. Solow later modified this framework by introducing variable capital-labour ratios and technological progress.
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