- the Harrod-Domar model suggests that low national savings and poor capital output are the biggest barriers preventing the development of an economy
- it explains that
- higher level of savings
- makes investment in capital easier
- a better capital stock leads to higher economic growth
- this allows for further savings and further investment in capital stock
- it explains that low national savings leads to poor investment in capital
- this is difficult for developing countries to achieve because there is no easy way to increase savings in the economy
- it is also possible to enter this cycle if the government directly subsidise or invest in capital
- A* point
- rate of economic growth = level of savings/ capital output ratio
- e.g. if savings rate is 10% and capital output is 2x
- then the economy will grow by 20%