# Harrod domar model

**Topics:**Developing country, Developed country, Cyprus

**Pages:**2 (430 words)

**Published:**October 25, 2014

Harrod in his Second Essay on Dynamic Theory which he tagged “natural rate of interest”, tried to make his model more applicable to underdeveloped countries. He carefully elaborated the supply side of his fundamental equation by introducing the role of interest rate in determining the supply of savings and the demand for savings. He observed a significant influence between interest and growth rate of income and defined the natural rate of interest (rn) as the ratio of the natural growth rate of per capita output (Pc) and the natural growth rate of income (Gn) to the elasticity of diminishing utility of income (e). So we have: rn/e = Pc.Gn Taking the values of Pc and Gn as given, the natural rate of interest depends on the value of e which is assumed to be less than Unity (1), meaning that rn and e are inversely related to each other. When e is small, rn is high and vice versa. Harrod, recognising the fact that the less developed...

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