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**JOIN KHALID AZIZ
**

ECONOMICS OF ICMAP, ICAP, MA-

ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

Domar Keynesian based models Saving rates Capital/Output ratio or Personal Consumption Gross Savings Gross Investment Net Investment. we will encounter the following terms: Lord Harrod and Mr.Topics for today In growth models. or Capital Capital Productivity Capital stock GDP Accumulation Depreciation Dynamic models .

they assume that there is unemployment: production responds fast to increases in aggregate demand because capital and labor is unemployed.What is a Keynesian Growth Model? Keynes’ model and Keynesian models were developed to explains business cycles • A short run phenomena As such they attribute a major role to aggregate expenditures (demand side) Regarding the supply side. .

at full employment Macroeconomic Equilibrium – AS = AD – Or – S=I . Government expenditures X-M. Foreigners’ Expenditures Aggregate Supply – AS < ASfe – Aggregate Supply. AD – – – – – AD = C + I + G + X-M C. Aggregate Demand. Consumption expenditures I. Investment expenditures G.

A Keynesian Model A Keynesian growth model takes a long run perspective. – Aggregate demand (or savings=investment) still is important. but – It also includes the aggregate supply • Investment has two impacts: – On expenditures (in the short run) – On capital stock (in the long run) .

Trends and business cycles Trend Real GDP One business cycle Years .

Saving rates and technology can be changed – government interventions without consideration to prices .Main Propositions Economic growth can be accelerated by – changing the saving rate – improving technology.

Harrod-Domar Growth Model A Flow chart model Depreciation Rate Saving Rate d D Ig S s C GDP In v= K/Y or Capital/Output a=Y/K Ratio or Productivity Capital Production function .

Factors Explaining the growth rate According to Harrod-Domar model + Rate of Economic Growth s + Saving rate g _ a d Capital productivity Capital depreciation Explained variable Explanatory Variables .

v S s g i a n a c e w h u m o w e n i ) I ( t s v ) K d ( l a t i p c S=Y. If we know the initial capital stock K. and we know a. we know growth of output dY dK a=dY/dK K .s s=dS/dY dY Y=K. lf a tI o w n k e w o n k e .a I If we know dK and a. (how much output increases when capital increases 1 unit) then we know what will total output Y be. then we know total savings S.Arithmetic specification Without Depreciation If we know output Y. which is the saving rate. and we know s.

a .10 S=.10 dY = s.10 If we know dK=.20.20 dK=. = I t s v ) 0 1 .10 K=5 . we know growth of output dY=0.20 then we know total output Y=1 a=.a/Y Y=1 g=s.a dY=.10.10 and a=. then we know total savings S=. and we know its productivity a=.10 lf a tI o w n k e e w 0 1 .v = S s g n i a n a c e w t h o k w e n i 0 1 .02=2% By approximation: dY/Y=s.02=2% Since Y=1 If we know the initial capital stock K=5.Numerical specification Without Depreciation If we know output Y=1 and we know the saving rate s=.t = K d ( l a i p c Or … s=.

20 . then g=0.Economic growth formula According to Harrod-Domar the rate of economic growth is defined by the formula: g = s.0.40? What happens if the depreciation (d) rate is 2% ? .02 -0.01 = 0.01 = 0.a – d that is.10*0.01 = 1% What happens if the rate of saving (s) increases to 20% ? What happens if the productivity of capital (a) increases to 0. if s=10% and a=0.20 and d =1%.

Y where s is the average propensity to save or average saving rate.Mathematical derivation of Harrod-Domar model .Ia = m.Ia where m is the investment multiplier Conventional Keynes’ Model .Y = Ia Y = 1/s. In the conventional short run Keynesian model investment (I) is given. Specification Saving function (demand side) S = s. I = Ia In equilibrium S=I Solving the model s.

what will happen if the economy was at full employment? The only way for production to increase will be an increase in the capital stock. With more capital (and labor) the economy will produce more GDP.In this model national GDP increases because the autonomous demand (I) increases. But. . It is assumed that aggregate supply responds as to produce what is demanded.

∆K . therefore. We. which is constant Now we can determine how a change in capital changes income.Mathematical derivation of HarrodDomar model (2) Keynes’ Model Expanded to Consider Growth Harrod and Domar explained how the aggregate supply expands.K production function Where a is the productivity of capital: ∆Y/ ∆K. one on the aggregate demand side (businesses expend more) and another in the aggregate supply side (more investment increases capital stock and thereby businesses produce more the next period). need to add a production function: Y = a. investment has two effects. For them. ∆Y = a.

there is not depreciation.Y = ∆Y/a s. i. Returning to the equilibrium condition (S=I) we solve the model again for the long run case s.a = ∆Y/Y Calling ∆Y/Y = g : rate of GNP growth . but we know that ∆K = ∆Y/a.e.Y = Ia = ∆K. It changes by businesses. and government investment: ∆K = Ia We are assuming that capital doesn’t ware out.Mathematical derivation of HarrodDomar model (3) What we need to know is how capital changes. then s.

a – d Where d is the depreciation rate per year.Mathematical derivation of HarrodDomar model IV g = s.a If we recognize that capital depreciates: g = s. Why? . Notice that in this model the rate of growth (g) is constant.

Harrod’s way: K = v.d .Y where v = 1/a g = s/v And with depreciation g = s/v .

To growth model Production function K GDP2> GDP1 GDP1 GDP GDP Production function Productivity rate N K .

To growth model – Labor/capital proportions are fixed K GDP2> GDP1 GDP1 GDP GDP Production function Assumptions Productivity rate N – Saving rate is given S K S Saving rate Saving function Income = GDP .

I Y C S In D D K .Non-existence of equilibrium Y.D.S.

Review You should now be familiar with the following terms: Technology or capital/output ratio Saving rate Depreciation rate Capital accumulation Growth rate .

COM. MA- ECONOMICS.ALNOOR SOCIETY. B. PAKISTAN.F. MBA & PIPFA.COM. ICAP. BLOCK 19.3 ICAP MODULE D. BBA.3.JOIN KHALID AZIZ ECONOMICS OF ICMAP.4 ICAP MODULE B. KARACHI. B. BBA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1. MBA & PIPFA. . COST ACCOUNTING OF ICMAP STAGE 2. CONTACT: 0322-3385752 0312-2302870 R-1173.AREA.B.

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