Harrod Domar growth model

The Harrod–Domar model is a Keynesian model of economic growth. It

is used in development economics to explain an economy's growth rate
in terms of the level of saving and of capital. It suggests that there is no
natural reason for an economy to have balanced growth. The model was
developed independently by Roy F. Harrod in 1939 and Evsey Domar in
1946.
Mathematical formulization:
Let Y represent output, which equals income, and let K equal the capital
stock. S is total saving, s is the savings rate, and I is investment. δ stands
for the rate of depreciation of the capital stock.
Assumption:
Y = f(K) Output is a function of capital stock only (labour is
irrelevant).
dY Y
=C= The marginal product of capital is constant; the
dK K
production function exhibits constant returns to scale.
This implies capital's marginal and average products are
equal.
F(0) = 0 Capital is necessary for output.
Sy = S = I The product of the savings rate and output equals
saving, which equals investment
∆K = I  I - The change in the capital stock equals investment less
∆ꝬK the depreciation of the capital stock

Derivation:
Derivation of output growth are

Y = f(k)
dY Y ( t +1 )−Y (t)
 dK =c= K ( t +1 )−K (t)

dY Y ( t+1 )−Y (t)

 dK =c= K ( t ) + sY ( t ) −K ( t )− Ꝭ K (t)
, K(t) and K(t) cancel out
 dY Y ( t+ 1 )−Y (t )
 dK =c= sY ( t )− Ꝭ K (t)

Y ( t+ 1 )−Y (t )
dY d K (t )
 dK =c= sY ( t )− Ꝭ
d K (t )
Y (t)
K(t) 0r capital multiplier is d Y (t )
Y (t )
d Y (t )
d K (t )
Now multiply both with sY ( t ) − Ꝭ d Y ( t ) Y (t )
dK ( t )
 C[ sY ( t ) − Ꝭ dY ( t ) Y (t)] = Y ( t+1 )−Y (t) take a common Y(t)

dK ( t )
 cY(t)[ s− Ꝭ dY ( t ) ] = Y ( t+1 )−Y (t) divide both side on Y(t)

dK ( t )
cY (t )[s− Ꝭ ] Y ( t +1 )−Y (t)
 dY (t ) = Y (t )
Y (t)

dK ( t ) Y ( t +1 )−Y (t) dY
 c s−c Ꝭ = substitute dK instead of c
dY ( t ) Y (t )

dY dY dK ( t ) Y ( t +1 )−Y (t)
 s− . Ꝭ. =
dK dK dY ( t ) Y (t )

dY dY dK ( t ) Y ( t +1 )−Y (t)
 s− . Ꝭ. =
dK dK dY ( t ) Y (t )

Y ( t+1 ) −Y (t)
 c s− Ꝭ= Y (t)

The growth rate of output thus shows that the saving rate times the marginal
product of capital minus the depreciation rate equals the output growth rate.

Criticism:
The main criticism of the model is the level of assumption, one being that
there is no reason for growth to be sufficient to maintain full employment; this
is based on the belief that the relative price of labour and capital is fixed, and
that they are used in equal proportions. The model explains economic boom
and bust by the assumption that investors are only influenced by output
(known as the accelerator principle); this is now believed to be correct.