Let us make an in-depth study of the similarities and dissimilarities between Harrod and Domar economic growth model.
Similarities between Harrod and Domar Economic Growth Model:
(i) The models are based on similar assumptions. It is for this reason that the names of Harrod and Domar are clubbed in any discussion of growth models.
(ii) The models employ Keynesian saving-investment equality as a condition for steady growth.
(iii) Harrod’s warranted growth rate (Gw) signifies the same thing as the product of the marginal propensity to save (σ) and the productivity of capital (σ) in Domar’s model. In other words, Gw = α σ. Both these models stress the “Knife-edge equilibrium.” It is due to the rigid assumptions.
(iv) Both the models have been built in the context of advanced economies, where capital is found in abundance. These models are more relevant to developed economies rather than to backward economies.
(v) As against Keynes’ macro-static theory, Harrod and Domar hold that a dynamic approach to growth should be introduced in the long run.
Differences between Harrod and Domar Economic Growth Model:
Although the models had been evolved in similar conditions, yet there are differences in the two models which are as under:
(i) In Domar’s model, productivity of capital is represented by of which means that it is the output-capital ratio. In Harrod’s model, the capital-output ratio is represented by C which is less than one. So Domar’s a is equivalent to IIC in Harrod’s model.
(ii) Though Harrod and Domar have employed the acceleration co-efficient with only different symbols in the models, yet there is a subtle difference between C and a. Harrod’s acceleration co-efficient may be called psychological while that of Domar is technological. Harrod is of the opinion that producers would invest C times the increment of income. It means that when income increases, the producers’ psychology would be to make net investment which is C times the increase in income.
By contrast, Domar’s accelerator is technological. Domar has used productivity of capital (a) in his model which implies the relationship between investment and output. In this model, investment is the cause and output is the result. In other words, investment is an independent variable and income is the dependent variable. Since it depends on the nature of technology. Domar’s accelerator is technological in character.