According to the Harrod-Domar growth model, if a nation has a savings rate (s) of 15\% and… — JAMB UTME

According to the Harrod-Domar growth model, if a nation has a savings rate ( $s$ ) of $15\%$ and an incremental capital-output ratio ( $k$ ) of $3$ , what is its expected annual economic growth rate ( $g$ )?

$5\%$ Answer
B
$45\%$
C
$0.2\%$
D
$12\%$

Answer

The expected annual economic growth rate is

5\%

In the Harrod-Domar growth model, the economic growth rate (

g

) is directly proportional to the savings rate (

s

) and inversely proportional to the incremental capital-output ratio (

k

), expressed as

g = \frac{s}{k}

. Substituting

s = 15\%

and

k = 3

gives

g = \frac{15\%}{3} = 5\%

Step-by-Step Solution

Identify the given variables and the Harrod-Domar growth model formula

Savings rate

s = 15\%

, Incremental Capital-Output Ratio

k = 3

. The Harrod-Domar formula is

g = \frac{s}{k}

The model states that national economic growth depends directly on savings rate and inversely on capital productivity requirements.

Substitute the values into the formula to compute growth rate

g

g = \frac{15\%}{3} = 5\%

Dividing the savings rate by the capital-output ratio yields the rate of GDP expansion.

Key Concept

Harrod-Domar Growth Model

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic