Scribd
Upload
373 views6 pages

Domar Model of Growt1

1) The Domar model addresses how fast investment needs to grow for income growth to match productive capacity growth at full employment. 2) It assumes constant saving and capital productivity rates. Equating demand and supply growth rates shows that investment must grow at the rate of the saving rate multiplied by the capital productivity rate. 3) This can be represented diagrammatically with income on the x-axis and investment on the y-axis. The intersection of the saving and investment lines determines the income level, and increasing investment leads to higher income and productive capacity.

Uploaded by

vikram inamdar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
373 views6 pages

Domar Model of Growt1

1) The Domar model addresses how fast investment needs to grow for income growth to match productive capacity growth at full employment. 2) It assumes constant saving and capital productivity rates. Equating demand and supply growth rates shows that investment must grow at the rate of the saving rate multiplied by the capital productivity rate. 3) This can be represented diagrammatically with income on the x-axis and investment on the y-axis. The intersection of the saving and investment lines determines the income level, and increasing investment leads to higher income and productive capacity.

Uploaded by

vikram inamdar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Domar Model of Growth :

Assumptions, Explanation and


Other Details
Article Shared by <="" div="" style="margin: 0px; padding: 0px; border:
0px; outline: 0px; font-size: 14px; vertical-align: bottom; background: transparent; max-width:
100%;">
ADVERTISEMENTS:

Let us make an in-depth study of the subject matter,


assumptions, explanation and diagrammatic representation
of the Domar model of growth.
Subject Matter of Domar Model:
Domar presented his growth model in his pioneer work expansion and
employment in 1947.

Domar’s growth model addresses itself to the question as to what


should be the rate of growth of investment so that the rate of growth of
income coincides with the rate of growth of productive capacity.

ADVERTISEMENTS:

In short, Domar’s Model is an attempt to determine the rate at which


investment purchasing must increase in an economy, if full-
employment levels of production are to be maintained.

According to Domar, investment raises productive capacity on the one


hand and on the other hand it raises total demand in terms of total
income. Productive capacity can be optimally utilised only if there is
equivalent demand for the goods produced. That is, for a state of
equilibrium in the economy, it is required that total supply (or
productive capacity) equals total demand (or income).

Assumptions of Domar Model:


1. There is an initial full employment level of income that has already
been achieved.

2. Absence of government interference and foreign aids.

ADVERTISEMENTS:

3. The marginal and average propensities to save are equal.

4. There are no lags in adjustment.

5. The propensity to save and capital co-efficient are considered


constant.

6. Depreciation is measured to the cost of replacement of depreciated


asset by another one of the same productive capacity.

7. The economic system is closed.

Explanation of the Domar Model:


Domar builds his model from both demand as well as the supply side.
He stressed on the dual character of investment and it provided the
solution for steady growth.

The various symbols used in Domar’s model are as under:


Yd = Level of national income or level of effective demand at full
employment.
Y3 = Level of productive capacity or supply at full employment level.
ADVERTISEMENTS:

K = Real capital

I = Net investment which results in the increases of real capital i.e. ∆


K.

α = Marginal propensity to save which is reciprocal of multiplier,

σ = Productivity of capital or net investment.


Domar started his model with the help of the equation given
by K.K. Kurihara:
Yd = I/ α
This equation shows that the level of national income is directly
proportional to the net investment. Any increase in the level of
investment increases the national income and vice-versa. The effective
demand is inversely proportional to marginal propensity to save. Any
increase in marginal propensity to save will decrease the level of
effective demand and vice-versa. This equation explains the demand
side of investment.

Ys = σK
This equation explains that supply of output (Ys) at full-employment
depends upon two factors: productive capacity of capital c and amount
of real capital (K). Any increase or decrease in any of these two factors
will raise or reduce the supply of output. This is the supply side of
investment.
For equilibrium the demand and supply should balance

Y d = Ys
i.e. I/ α = σK

or I = α σ K

This equation explains the condition for steady growth and it is


possible only when investment equals the product of saving income
ratio, capital productivity and capital stock. For this, we must give
increment to the demand as well as to supply equation.
The demand and supply equations in incremental form are:
This implies that the growth rate of net investment must be equal to
the product of marginal propensity to save and the productivity of
capital. In the words of Kurihara, “It is an increase in productive
capacity (Ys) due to increment of real capital (K) which must be
matched by an equal increase in effective demand (∆Ed) due to an
increment of investment (I), if a growing economy with an expanding
stock of capital is to maintain continuous full-employment.” Thus, the
necessary condition to maintain steady growth is

In the words of Meier and Baldwin, “The answer to the problem of


what rate of growth is necessary to maintain a continuous state of full-
employment is that investment and real income must grow at a
constant annual percentage rate equal to the product of the propensity
to save and the average productivity of investment.”

Domar’s equation of steady growth can be explained with the help of a


numerical example. Suppose a = 50% and a = 6% then
∆I/I = 50/100 X6/100 = 3/100 or 3%

Thus, income or investment must grow at an annual rate of 3 percent


if full-employment growth rate is to be maintained. According to
Brenner, “Full-employment requires that investment and income to
grow at a constant annual relative rate equal to the product of
propensity to save and the average productivity of investment.”

Diagram Representation of Domar Model:


Let us explain Domars model with the help of a diagram:
In this diagram, income has been exhibited on X-axis and investment
on Y-axis. The line S(Y) passing through the origin shows the level of
saving corresponding to different levels of income I0 I0, I1I1 and I2I2 are
the various levels of investment. Similarly, Y0P0 and Y1P1 is the
productivity of capital corresponding to different levels of investment.
The productivity of capital remains unchanged as lines Y0P0 and
Y1P1are parallel.
The level of income is determined by the factors of saving and
investment. The level of income Y0 is determined by intersection of
saving line and investment line. When Y0 S0 is invested, the income
will increase from OY0 to OY1 which, in turn, results in the increase in
productive capacity.
The rate of increase of income depends upon productivity of capital
which is measured by the slope of the line Yp P0. Higher the slope of
this line, higher will be the productivity of capital and vice-versa.
When the level of income is OY1, the level of saving is Y0 S1 with this
investment Y0S1the income will further rise to the level of OY2. This
increase in income enhances the productive capacity of the economy.
In short, Domar Model has explained the technological relationship
between the capital accumulation and full-employment growth rate of
output. But, on the contrary, Harrod has shown the psychological
relationship between capital accumulation and full capacity growth
rate of output.

Therefore, Domar model suggests the role of planned investment in


the economic development, while Harrod’s model stresses on induced
investment.

DOWN

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy