The Harrod–Domar model is an early post-Keynesian model of economic growth. It is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939,[1] and Evsey Domar in 1946,[2] although a similar model had been proposed by Gustav Cassel in 1924.[3] The Harrod–Domar model was the precursor to the exogenous growth model.[4]
Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution[5]—, and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.[6][7]
According to the Harrod–Domar model there are three kinds of growth: warranted growth, actual growth and natural rate of growth.
Warranted growth rate is the rate of growth at which the economy does not expand indefinitely or go into recession. Actual growth is the real rate increase in a country's GDP per year. (See also: Gross domestic product and Natural gross domestic product)