Warranted Growth Rate

Warranted Growth Rate

In the Harrod-Domar model, the growth rate at which an economy will neither expand unsustainably nor go into recession. The warranted growth rate is equal to the savings rate of the economy divided by its capital output ratio. In order to be true, the savings rate is assumed to be a constant proportion of national income and the capital output ratio is derived in part from the investment rate, which is also assumed to be a proportion of the national income.
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Equation 1.6 indicates how the Harrod-Domar warranted growth rate, s/v, can be derived for the Kaldor case.
The corresponding warranted growth rate [G.sub.w] is thus represented by the ratio [s.sub.d]/[C.sub.r], [s.sub.d] being the desired proportion of income saved (that is, the inverse of the average multiplier) and [C.sub.r] being the incremental capital/output ratio (that is, the acceleration coefficient determining the volume of investment corresponding to a unit increase of output) deemed to be appropriate by entrepreneurs.
If the share of profits increases, and if profit takers save more than others, then, ceteris paribus, the warranted growth rate accelerates.