62 THE HARROD-DOMAR MODEL OF ECONOMIC GROWTH 1s technically capable of variation but 1s constrained by a relatively imflex- ible interest rate We shall have occasion to return to this issue when we discuss the so-called ‘neoclassical’ models of growth in Section 4 5 3.6 Domar's Model of Growth Domar’s growth model ((57) and (58)) 1s frequently bracketed with that of Harrod because of the sumulanty between his central result and Harrod’s ‘fundamental equation’ Thus 1s rather to be regretted as the two theores are most fruitfully studied 1n therr own right rather than as some kind of amalgam Domar’s approach is to focus clearly on the dual nature of the rate of investment in a capitalist economy (a) Investment determines the actual level of income through the Keynesian multiplier process (b) Investment, by increasing the size of the capital stock (we are con- tinung to assume the absence of depreciation) increases the maximum potential level of income Domar's model can be easily formulated by exactly analagous steps to that of Harrod but some insight 1s gamed if the game 1s played along the lines that Domar orginally intended") Let Y = the actual level of income or output Y = the maximur potential level of national income or output § = the constant average and marginal propensity to save I the flow of investment a = the ‘potential social average mvestment productivity’ Only ¢ of the above symbols requires any comment and 1t1s fair to pomt out that this 1s a somewhat confusing notion to grasp Domar defines 1t as EM! Thus, o refers to the rate of change of the potential capacity for the pro- duction of output associated with a given level of investment and we note for future reference that ‘it does not imply that factors of production other than capital and technology remain constant’ ((59} p 74) Domar assumes that o 1s a constant and, as a consequence, equation (3 6 1) Y=ol G61) ) The following constitutes an extremely condensed version of Domar's model and, m particular, the ‘junking” process 13 ignored ‘The interested student 1s urged to consult the references (57), (58)3.7 HARROD AND DOMAR: SOME COMPARISONS 63 is a comprehensive description of the supply side of the economy. The actual level of income at any point in time is determined by a con- ventional simple multiplier process: y=l, s or, in terms of the rate of change of income, (3.6.2) Let us assume, with Domar, that the economy is initially in a position of full-employment equilibrium which implies that Y = Y. Domar’s basic purpose was the discovery of the growth rate of investment that would maintain Y equal to Y. Clearly, if Y is to remain equal to ¥ then Y must equal Y and, combining equations (3.6.1) and (3.6.2), we obtain or J. os (3.6.3) Equation (3.6.3) demonstrates that, as both s and o are assumed to be constant, the rate of growth of investment that will maintain actual income equal to the maximum potential level of income is a constant proportional rate of sc. The astute student will already recognize the similarity between equation (3.6.3) and Harrod’s ‘fundamental equation’. Moreover, a little algebraic manipulation will confirm that the other major macroeconomic variables must grow at the same rate if equilibrium is to be maintained, For our purposes, the above exposition contains the core of Domar’s theory and the similarities and differences between it and Harrod’s model are discussed in the next section. 3.7 Harrod and Domar: Some Comparisons The similarities between’ the central results of the models of economic growth associated with Harrod and Domar resulted in the joint title ‘Harrod-Domar’ being used to refer to their approach to growth. For Harrod, steady-state equilibrium growth necessitates that: G=s Vr