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Table of Contents

  1. Topic pack - Development economics - introduction
  2. 4.1 Economic development (notes)
  3. 4.1 Economic development (questions)
  4. 4.2 Measuring Economic Development (notes)
  5. 4.2 Measuring development (questions)
  6. 4.3 The role of domestic factors in economic development (notes)
    1. Domestic factors - introduction
    2. An introduction to Tanzania
    3. Education
    4. Primary, secondary or tertiary education?
    5. A dependent population
    6. Tanzanian database
    7. Exploring education in Tanzania - data
    8. Exploring education in Tanzania - Maua and Namyani (video)
    9. Exploring education in Tanzania - lost dreams
    10. Exploring education in Tanzania - reflection
    11. Exploring health in Tanzania - data
    12. Exploring health in Tanzania - videos
    13. Exploring health in Tanzania - living with HIV
    14. Exploring health in Tanzania - reflection
    15. Use of appropriate technology
    16. Technology - sawdust stoves and clean water (videos)
    17. Technology - building good roads
    18. Use of appropriate technology - reflection
    19. Access to credit and micro credit
    20. Microcredit in the community (videos)
    21. Microcredit in the news
    22. Microcredit - reflection
    23. The origins of microcredit
    24. What are the pros and cons of microcredit?
    25. Empowerment of women
    26. Issues relating to empowerment of women (video)
    27. Empowerment - in the news
    28. Empowerment - reflection
    29. Income distribution
    30. Lorenz curve and Gini Coefficient
    31. Income distribution - Tanzania
    32. Income distribution - case studies
    33. Income distribution - reflection
    34. Building a development database (part 7)
  7. 4.3 The role of domestic factors in economic development (questions)
  8. 4.4 The role of international trade (notes)
  9. 4.4 The role of international trade (questions)
  10. 4.5 The role of Foreign Direct Investment (FDI) (notes)
  11. 4.5 The role of foreign direct investment (questions)
  12. 4.6 The role of foreign aid and multilaterial development assistance (notes)
  13. 4.6 The role of foreign aid and multilateral development assistance (questions)
  14. 4.7 The role of international debt (notes)
  15. 4.7 The role of international debt (questions)
  16. 4.8 The balance between markets and intervention (notes)
  17. 4.8 The balance between markets and intervention (questions)
  18. Print View

Theory of Development (1) Harrod-Domar Growth Model

Theoretical Development models do not appear on the syllabus anymore but you should have at least some idea of the 2 main theories (see also Pages 89 and 90)

Harrod-Domar Growth Model

The Harrod-Domar model is unsurprisingly named after two economists, RF Harrod and ED Domar, who were working in the l930s. The model suggests that the economy's rate of growth depends on:

  • The level of saving
  • The productivity of investment, i.e. the capital output ratio

They placed considerable emphasis on investment, savings and technology as the main agents of economic growth. Increased investment forces the production possibility curve outwards and create more wealth. The impact of this increased investment on the production possibility frontier is shown in Figure 1 below.


Figure 1 Increased investment shifting the production possibility frontier

The model concludes that:

  • Increasing the savings ratio, and/or the amount of investment and/or the rate of technological progress are vital for the growth process
  • Economic growth depends on the quantity and quality of labour and capital.
  • As developing countries often have an abundant supply of labour (however it neglects the quality of the labour so the conclusion is questionable), it is a lack of physical capital that holds back economic growth and development.
  • More physical capital (real investment) generates economic growth.
  • Net investment leads to more capital accumulation, which generates higher output and income.
  • Higher income allows higher levels of saving and so on...

The key to economic growth is therefore to expand the level of investment, both in terms of fixed capital and human capital. To do this, policies are needed that encourage saving and/or generate technological advances enabling firms to produce more output with less capital, i.e. lower their capital output ratio.

The model has been criticised for focusing on economic growth. Problems with the approach include:

  • Economic growth and economic development are not the same. Economic growth is a necessary, but not sufficient, condition for development
  • Savings and investment are a necessary, but not sufficient, condition for development
  • On a practical level, it is difficult to stimulate the level of domestic savings, particularly in the case of developing countries where incomes are low.
  • Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later (see Section 4.7)
  • The law of diminishing returns would suggest, that as investment increases, the growth of the productivity of capital will diminish and the capital to output ratio will therefore rise (more capital needed to achieve given increases in output)