Question

Suppose the growth of production in Country A follows Harrod-Domar Model. Country A has 100 people(labors) in Year 1. The capital K in Year 1 is 60. The incremental capital-output ratio v = 5 and the constant savings rate s = 0.1. There is no depreciation in capital. What is the growth rate of aggregate productions in Year 1?

Answer 1

2%

Step-by-step explanation:

Given that,

Number of people in year 1 = 100 labors

Capital K in year 1 = 60

According to Harrod-Domar model,

Growth rate in total output:

= savings rate ÷ capital output ratio

So, g = s ÷ v

g = 0.1 ÷ 5

= 0.02 or 2%

Thus, growth rate of aggregate productions (or total output) in year 1 is 2%.