The Harrod-Domar model was developed independently by Sir Roy Harrod in 1939 and Evsey Domar in 1946. It is a growth model which states the rate of economic growth in an economy is dependent on the level of saving and the capital output ratio.

If there is a high level of saving in a country, it provides funds for firms to borrow and invest. Investment can increase the capital stock of an economy and generate economic growth through the increase in production of goods and services.

The capital output ratio measures the productivity of the investment that takes place. If capital output ratio decreases the economy will be more productive, so higher amounts of output is generated from fewer inputs. This again, leads to higher economic growth.

Rate of growth (Y) = Savings (s)/ capital output ratio (k)

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