Answer to Question #221695 in Economics for Desmond Ternor

Question

Harrod asked a number of fundamental questions for the understanding of the growth performance of any country, be it developed or underdeveloped, namely: if changes in income induce investment, what must be the rate of growth of income for plans to invest to equal plans to save in order to ensure a moving equilibrium in a growing economy through time? In static Keynesian theory, if growth equilibrium is disturbed, will it be self-correcting or self-aggravating? And will this equilibrium rate be equal to the maximum rate of growth that the economy is able to sustain given the rate of growth of productive capacity? Analyse the various ways in which Harrod considered these questions?

 

Answer 1

If changes in income induce investment, then the rate of growth of income for plans to invest to equal plans to save in order to ensure a moving equilibrium in a growing economy through time should count a multiplier effect.

In static Keynesian theory, if growth equilibrium is disturbed, then it will be self-correcting.

This equilibrium rate will be equal to the maximum rate of growth that the economy is able to sustain given the rate of growth of productive capacity only if the economy produces at potential level of output.