Thursday, August 18

Harrod-Domar Formula for Two Sector Growth Models

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By V.K. Chetty & B.K. Pradhan

Working Paper No- 413

In this paper the much celebrated Harrod-Domar model is extended to include a non-consumable capital good. Here, growth rate of capital is directly proportional to saving rate and inversely proportional to weighted harmonic mean of capital output ratios of two sectors. Moreover, our formula includes differential prices for the two goods. Further, here, flexible prices or variable capital output ratio for consumer goods sector help to balance savings and investments avoiding the famed knife-edge problem. Our model can provide explanations for possible relationships between wealth income ratios on one side, and interest rate and rent on the other, and help to confirm the possibilities of Piketty’s well-known empirical observations.

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