Harrod Model in Dynamic Theory

Harrod's model focuses on how steady growth and full employment can be achieved in an economy.

The three rates are: 1) Actual growth rate (G), 2) Warranted growth rate (Gw), and 3) Natural growth rate (Gn).

The warranted growth rate (Gw) is the full capacity growth rate of income of an economy.

The natural growth rate (Gn) represents the 'welfare optimum' or the potential/full employment rate of growth.

One of the assumptions is that the level of ex-ante aggregate saving is a constant proportion of aggregate income.

Harrod's model integrates the theory of 'multiplier' with the theory of 'accelerator' to explain investment and growth.

The fundamental equation for actual growth rate (G) is: G = √s, where s is the average propensity to save.

The warranted growth rate (G_w) is the rate at which producers will be content with what they are producing. It is the 'entrepreneurial equilibrium' where demand and supply of goods and services remain in equilibrium, given the propensity to save.

The equation for the warranted growth rate is: G_w * C_r = s, where C_r is the required capital-output ratio and s is the saving-income ratio.

For an economy to achieve stable growth, two conditions must be satisfied: 1) The actual growth rate (G) must be equal to the warranted growth rate (G_w), and 2) The capital-output ratio needed to achieve G must be equal to the required capital-output ratio to maintain G_w given the saving coefficient (s).

According to Harrod, the natural rate of growth is the trend in production with full employment and no inflation.

The relationship is given by the equation: G_w = s / C_r. This implies that for full capacity utilization, income must grow at a rate equivalent to the average propensity to save divided by the capital-output ratio.