Harrod Domar model

Harrod-Domar Model - The Harrod and Domat growth models attempt to dynamically develop Keynes' theory of short-term macroeconomic balance. Keynes assumed that, in the short-term view of economic growth, production capacity (i.e., investment) is a given quantity.

When considering long-term economic growth, however, it must be taken into account that an increase in investments has two effects: on the one hand, national income grows at the same rate as investments, and on the other hand, the production capacity of an economy also increases.

Harrod now assumes that net investments are dependent on macroeconomic demand for goods. So if that rises, so does net investment, and with it, in turn, national income. This mechanism is called an accelerator. The increase in national income leads to a further increase in national income via the multiplier and also to an increase in net investment via the accelerator.

When economic growth has finally reached its peak, investments fall again, so that the accelerator and multiplier work in the opposite direction. Harrod saw this as the cause of the development of business cycles.

Domars Modell ist mathematisch formal identisch mit Harrods Modell. Bei Domar sind die Investitionen allerdings nicht an Veränderungen des Volkseinkommens gekoppelt, sondern unabhängige Variablen, deren Kapazitätseffekt er besonders betont. Ein gleichgewichtiger Wachstumsprozess ist nur möglich, wenn die Nachfrage, die etwa durch den Income effect zusätzlicher Investitionen entsteht, zur Auslastung der zusätzlich geschaffenen Kapazitäten führt und sie nicht übersteigt.

With their models, Harrod and Domar doubt that an economy without economic policy intervention by the state tends to achieve full employment. Because Keynes was of this opinion, Harrod and Domar are called Keynesians.

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