Final answer:
The rate of growth can be determined using the Harrod-Domar growth equation. To achieve 5% growth, the gross savings rate would have to be 15%. One criticism of the model is that it does not consider technological progress or the quality of capital, while another criticism is that it assumes a fixed savings rate.
Step-by-step explanation:
The rate of growth can be determined using the Harrod-Domar growth equation, which states that the growth rate (g) is equal to the savings rate (s) divided by the incremental capital-output ratio (ICOR).
In this case, the ICOR is 3 and the savings rate is 10%.
Therefore, the rate of growth (g) would be 10% / 3, which is approximately 3.333%.
To achieve 5% growth, we can use the same equation and solve for the savings rate (s).
Rearranging the equation, s = g * ICOR. Plugging in the values, s = 5% * 3, which equals 15%.
Therefore, the gross savings rate would have to be 15% to achieve 5% growth.
An exogenous growth theory criticism of the Harrod-Domar model is that it does not take into account technological progress or the quality of capital.
It assumes that the only way to achieve economic growth is through increasing the physical capital stock. In reality, technological progress and human capital also play important roles in economic growth.
An endogenous growth theory criticism of the Harrod-Domar model is that it assumes a fixed savings rate and does not consider the factors that influence savings behavior, such as income levels, interest rates, and government policies.
Endogenous growth theory argues that savings behavior is influenced by these factors and can therefore impact the rate of economic growth.