Harrod-Domar Growth Model

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Harrod-Domar Growth Model

A model for what creates economic growth. According to Harrod-Domar, growth equals a country's savings rate multiplied by the marginal product of capital less depreciation. Essentially, high savings generates growth because savings are eventually invested. The Harrod-Domar model has been used to explain lack of development in some parts of the world: because there is little capital to be saved, there is less capital to invest. Critics, however, contend that the model confuses growth and development (which are distinct) and that it can encourage reckless borrowing to spur development.