Harrod-Domar growth model
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Suppose that the country of less developed has a gross savings rate of 20%, a depreciation rate of 3%, and an incremental capital -output ratio (ICOR) of 2.5.
1- Using the Harrod -Domar (or AK) growth model, calculate the implied rate of growth of GNP per capita?
2- if the population growth rate in less developed is 1.5% per year, what is the implied rate of growth of GNP per capita?
3-How much would the rate of savings have to increase to raise the growth rate of total GNP to 9%?
4- Suppose that one -sixth of all investment is completely wasted by incompetent bureaucrats. Returning to the original numbers, what is the implied growth rate of total GNP?
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Solution Summary
The use of the Harrod-Domar growth model determine the growth rate of GNP as other variables change.
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1. The Harrod-Domar model equation gives us: g = s/θ-d, where g is the aggregate growth rate, s is the rate of savings, d is depreciation, and θ is the capital-output ratio. Here s = 20%, or 1/5, and ...
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