Villanueva, Josef S.

Ec 121 F
Mr. Sescon
20 November 2012
Paper 1: Harrod-Domar Model vs Solow Model

The main difference between the Harrod-Domar Model and the Solow Model is that each of

the models regard different factors as the driver of long-term growth. It can be said that the Harrod-

Domar Model is Keynesian and the Solow Model is Neoclassical. However, to be more precise, the

Harrod-Domar Model puts capital formation and saving as the forefront of economic growth and that

the Gross Domestic Product (GDP) of a country is directly proportional to the growth of investments.

Meanwhile, the Solow Model refutes that long term growth cannot be achieved through capital

growth alone since diminishing marginal utility must be taken into account. In the Solow Model, labor

is constant such that an increase in capital would readily increase the capital output per worker and too

much increase in capital will actually diminish productivity because the workers would have to use

multiple machines at the same time, if we were to consider the capital input to be machinery. The same

can be said about saving because saving resources in the current period to invest in capital on the next

period will never drive economic growth in the long run. Instead of capital and saving, the Solow

suggests that technological advancement is the ultimate driver for long term economic growth. Seeing

from the growth pattern of the US in the post-war era, technology seems to have a great impact on the

growth of the US economy.

In terms of the believability, the Solow Model offers more reality in its assumptions as seen by

the comparison of Easterly of the said model to the Harrod-Domar Model. From the writing of Easterly,

the practical example of Ghana as a country who has been receiving a lot of foreign aid and investment

has never taken off from its initial state some sixty years ago. Historically, only very few countries have

become consistent with the Harrod-Domar Model’s predictions and such quantity is an exception rather

than a norm.

On the other hand, the Solow Model whose principal subject is to explain the growth of the US,

has succeeded because it has shown that beyond the limits of capital-driven growth is economic
development put forth by technological progress. However, it is worth noting that the Solow Model is

only meant to represent the US economy and not the third world countries. However, many economists

have adapted the Solow Model to the growth of poor countries as well and it seemed that neither the

Solow Model nor the Harrod-Domar Model were accurate insofar as the economic growth of poor

countries is concerned.

Perhaps the inaccuracy of the two model lies in the fact that the two models were not calibrated

for the conditions in the poor countries. Take for instance the parameters of the Solow Model. Of course,

the initial conditions of the western countries to that of the poor countries are entirely different. Perhaps

one of the bigger factors why the two models are not so successful with the tropical countries is that the

governments of the western countries are more mature than that of the third world countries and the

former had better and more efficient ways of making things work. Moreover, it cannot be helped that

the models used for economic growth for the poorer countries come from the richer countries mainly

because economists have very little historical data on the poor countries to work on so no model can be

patterned after poor counties’ performance. Meanwhile, richer countries can afford to hire economic

historians to get historical data for their economic models.