Question

Consider the Harrod-Domar model of economic growth. Assume that the capital-output ratio is 3. (a) [5 Points] If the saving rate is 15 percent, what is the economic growth rate? (b) [5 Points] Suppose a country wants to grow at a rate of 15 percent. What is the gap in saving rate and how a developing country can expect to fill it?

Answer 1

1) Calculation of economic growth rate

Rate of Growth of GDP = Savings ratio / Capital output Ratio

Rate of growth of GDP = 15 / 3 = 5%

2) Calculation of saving rate

Savings ratio = Rate of Growth of GDP * Capital Output ratio

  Savings ratio = 15 * 3 = 45%