ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.

Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3

School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

LEARNING ACTIVITIES
Answer the following:
1. The Harrod-Domar growth model is based on the fundamental Keynesian
relationship between consumption and income. How does that relationship 'fit
into the Harrod-Domar model?

The fact that the main assumptions of the Harrod-Domar models are;
full-employment level of income already exists and; there is no government
interference in the functioning of the economy, it thus fits in Keynesian
relationship between consumption and income because Keynesian economics
focuses on demand-side solutions to recessionary periods. The intervention of
government in economic processes is an important part of the Keynesian
arsenal for battling unemployment, underemployment, and low economic
demand. The emphasis on direct government intervention in the economy often
places Keynesian theorists at odds with those who argue for limited government
involvement in the markets.

2. If the marginal propensity to consume in the Keynesian model increases (b in

the equation C = a + bY), what happens to the saving rate? What does this say
about countries that save a large proportion of income relative to those that
save less in terms of growth in the Harrod-Domar model?

The Harrod-Domar Model suggests that the rate of economic growth

depends on the Level of Savings wherein it proposes that higher savings enable
higher investment. Consequently, countries that save a large proportion of
income enables a higher investment compared to those countries that save
less.

3. Suppose the efficiency of the economy improves in the sense that. What will
this do to the growth rate in the Harrod-Domar model?

The Harrod-Domar Model also suggests that the rate of economic

growth depends on the Capital-Output Ratio wherein a lower capital-output ratio
means investment is more efficient and the growth rate will be higher. Hence,
if more output is generated with the same capital stock, this will result to an
investment which is less efficient and lesser growth rate. The capital-output
ratio also needs to take into account the depreciation of existing capital.

4. What does the population growth adjustment to the Harrod-Domar model do to

the growth path of income?

In terms of population growth, countries who often have an abundant

supply of labour lack of physical capital that holds back economic growth and
development. Well, boosting investment generates economic growth which
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

leads to a higher level of national income. As a result due higher income, higher
number of people will be save.

5. How would the growth of Europe following the bubonic plague episodes in the
thirteenth to seventeenth centuries have been affected if Europe had been
following the growth path described by the Harrod-Domar model? Do you think
this actually happened? If not, why not?

In the long term, the demographic restructuring caused by the bubonic

plague perhaps fostered the possibility of new economic growth. As one scholar
notes, the bubonic plague or also known as the “Black Death”, unlike other
catastrophes, destroyed people but not property and the attenuated population
was left with the whole of Europe’s resources to exploit, resources far more
substantial by 1347 than they had been two and a half centuries earlier, when
they had been created from the ground up. In this environment, survivors also
benefited from the technological and commercial skills developed during the
course of the high Middle Ages. Hence, If Europe had been following the growth
path described by the Harrod-Domar model, there is still a chance for the
downfall of Europe’s economy because as what has been said earlier, bubonic
plague destroyed people, not the resources. There may be investments, but it
is not enough for the people of Europe.

6. What are the main differences between the Solow and the Harrod-Domar
models? Is the Solow model more realistic? How does it introduce more realism
into its assumptions?

The main difference between the Harrod-Domar model and the Solow
model is that Harrod-Domar model assumes constant marginal returns to
capital, while Solow assumes decreasing marginal returns to capital. The
Solow-Romer model is used to find growth in long term condition. Thus we can
say that the Solow model is more advanced and realistic than Harrod-Domar
model.

7. What is the steady state in the Solow model? Describe in words why the
economy tends toward the steady state?

The steady-state is the key to understanding the Solow Model. At the

steady-state, an investment is equal to depreciation. That means that all of
investment is being used just to repair and replace the existing capital stock.
No new capital is being created. So, if the capital stock isn't growing, nothing is
growing.

8. What are the variables that the Solow and the Harrod-Domar models share in
common?
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

The Solow–Swan model being an exogenous growth model is an

extension to the Harrod–Domar model. Hence, being as the extended version
of the previous Harrod–Domar model, common variables are savings rate,
depreciation and the capital output ratio.

9. Explain how per-capita income in the steady state can increase in the Solow
model.
𝑘∗ 𝑠
=
𝑦∗ 𝑛+𝜹
The ratio of capital per capita to income per capita in the steady state
will be a positive function of s and an inverse function of n and δ. In the steady
state, the ratio k*/y* is a constant. This means that when saving increase, the
ratio does not change—that is, both capital per capita and income per capita
increase at the same rate. Conversely, both capital per capita and income per
capita decrease at the same rate if the depreciation and population growth rates
are higher.

10. Explain intuitively what the new growth theories add in terms of realism to the
Solow model.

The various predictions of Solow-Swan model includes that the rate of

savings and technological progress does not have any influence over the
outputs growth rate. The increase in rate of savings is capital inductive as it
increases the capital accosted per labor. The biggest implication suggested by
the Solow-Swan model is the conditional convergence. Under the theory of
conditional convergence if countries have the same variables like rate of
savings, technology and growth rate of population which affect growth will
ultimately converge to a particular state and it would be equal for all the
countries. The other implication of this theory would be that if a poor nation has
the same variables like a rich nation then both of them will have same constant
growth rate in long duration.

11. Are structuralist approaches to economic growth consistent with the Harrod-
Domar theories of growth? How do they differ in emphasis?

The structuralist theory of development argues that the governments of

developing countries must intervene to ensure that their economies will be able
to become fully modernized and industrial. If governments do not do this, they
will be doomed to remain in a colonial relationship with the rich world. The fact
that the main assumptions of the Harrod-Domar models are; full-employment
level of income already exists and; there is no government interference in the
functioning of the economy, structuralist approaches to economic growth is not
consistent with the Harrod-Domar theories of growth.
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

12. List the important variables that economists have identified that contributed to
the rapid growth of the Asian economies in the decades of the 1960s to the
mid-1990s. How do these variables relate to the variables discussed in the
three growth models (Harrod-Domar, Solow, and new growth)?

The World Bank attributed the “East Asian Miracle” to sound

macroeconomic policies with limited deficits and low debt, high rates of savings
and investment, universal primary and secondary education, low taxation of
agriculture, export promotion, promotion of selective industries, a technocratic
civil service, and authoritative leaders. These variables relate to the variables
discussed in the three growth models which provides an explanation of long
term economic growth using the fundamentals of neoclassical theories like
labor and productivity.

13. Other developing regions of the world have not been as successful in raising
their standards of living in this period. Can you identify several factors that might
have been responsible for these poorer results?

There are a number of specific areas in which developing region’s

governments can foster higher productivity. These are better transport,
communication, energy, and other infrastructure that improve the productivity
of all firms and industries.

14. What evidence is there that there has been a convergence in incomes among
the countries and regions of the world, according to Robert Barro? How do his
results compare with those we would expect from the Solow model?

The determinants of economic growth and investment were analysed in

a panel of around 100 countries observed from 1960 to 1995. The data reveal
a pattern of conditional convergence in the sense that the growth rate of per
capita GDP is inversely related to the starting level of per capita GDP, holding
fixed measures of government policies and institutions, initial stocks of human
capital, and the character of the national population.
According to Barro, one area that is considered additional influences on
economic growth and investment of particular concern to continental Europe
involves governmental interventions into the operations of labor markets. The
interventions that exist include mandated levels of wages and benefits,
restrictions on labor turnover, and official encouragement of collective
bargaining. As compared from his result, it is quite similar to Solow-Swan Model
in which it had a short term implication that in short terms growth could be found
by referring the steady state that was now created by capital investment
change, growth of labor force and the rate of depreciation, the rate of savings
affected the capital investment.
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

15. What is the difference between conditional convergence and absolute

convergence? What do you think would be the result if we tested conditional
convergence between South Asia, and Southeast Asia, and East Asia?

Conditional convergence implies that a country or a region is converging

to its own steady state while the absolute convergence implies that all countries
or regions are converging to a common steady state potential level of income.
Over the past several decades, East Asian economies have achieved
higher economic growth rates than economies in other regions. These Asian
economies have all followed a similar growth path (growth convergence) from
a low-income, high-growth state to a middle-income, middle-growth state
through industrialization. However, growth rates in Asian economies today are
slowing down to those of advanced economy levels. Thus, fear will emerged
because of the reason that these economies will never catch up with the income
levels of advanced economies and instead will be trapped in middle-income
status. Still, it becomes standard to consider “conditional convergence,” in
which the rate of convergence differs among different economies. Hence,
convergence paths may not be unique, but rather multiple paths might exist.
Theoretically, this reflects differences in the level of technology and its growth
contribution.

16. What measures can the poorer countries take to accelerate their growth to bring
their standards of living more in line with the rest of the world?

Many factors that are relevant to the production function in each

economy can explain differences in growth and can also be considered as
measures to accelerate the growth of other countries. The list ranges from
historical and geographic conditions to institutions and accumulated human
capital. Historical conditions can also include human capital and an economy’s
“colonial origin”. Demography also matters since the population’s age
composition, in addition to its overall size, is important for labor inputs.

17. What does the term Asian “miracle” mean? Discuss the key aspects of this
“miracle” as it evolved during the decades prior to the Asian financial crisis. Be
specific, using country examples. Which of these factors do you believe to be
the key ingredients to rapid growth?

The development experience of several high-performing East Asian

economies in the 1970s and 80s is often referred to as the “East Asian miracle”
after the publication of a World Bank report in 1993 and has stirred policy
debates among academic researchers and policy makers over the past decade.
The most important proximate cause of the miraculous transformation of
the East Asian economies was rapid capital accumulation, a process that was
nurtured and sustained by a combination of market-oriented policies and
institutions. This combination of policies and institutions emphasized, on the
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T72/AE18/ ECONOMIC DEVELOPMENT
Accountancy

one hand, the openness of these economies to the external world, and on the
other hand, a domestic economic environment conducive to production. Their
openness allowed these economies to tap into the virtually unlimited
international trading opportunities in the world economy and to access new
technology. The domestic economic environment, which was underpinned by a
combination of macroeconomic stability, labor market flexibility, and good
economic governance, harnessed by conducive legal and political institutions,
encouraged production (over rent-seeking), high investment, and efficient use
of investible resources. Rapid growth, which was nurtured by a commensurate
increase in employment, led to quick dissolution of the poverty problem.

18. How do the factors that you have identified reflect on the proposition that the
Asian “miracle” was a result of “perspiration,” and not “inspiration?”

The newly industrializing countries of Asia have achieved rapid growth

in large part through an astonishing mobilization of resources. First, economic
growth in the Four Tigers is hardly miraculous: it is just the expected outcome
of a massive accumulation of labor and capital. Second, the progress of these
economies along this growth path for the past 30 years cannot continue. Sooner
or later they will experience a dramatic decrease in growth. Third, the societies
in these countries made enormous sacrifices of consumption and leisure to
achieve these growth rates. Therefore, Asian growth seems to be driven by
extraordinary growth in inputs like labor and capital rather than by gains in
efficiency.