LINEAR

GROWTH THEORY
ECON 113
 Meet our team!

LEO-JAY FRANCISCO
KLUBELLE LIANNE MARMOLENO JENNIE PELAYO
LAPANG

BS ECONOMICS 4B
 Meet our team!

KLUBELLE LAPANG
LIANNE JENNIE PELAYO LEO-AY FRANCISCO
MARMOLENO

BS ECONOMICS 4B
 Meet our team!

LIANNE
MARMOLENO JENNIE PELAYO LEO-JAY FRANCISCO KLUBELLE LAPPANG

BS ECONOMICS 4B
 Meet our team!

JENNIE PELAYO
LEO-JAY KLUBELLE LAPANG LIANNE
FRANCISCO MARMOLENO

BS ECONOMICS 4B
 1 2 3
Introduction to Rostow’s Stages of The Harrod-
Linear Growth Economic Growth Domar Model
Theories Theory

Table of
contents 4 5
Obstacles and Conclusion and
Constraints to the Criticisms of the
Harrod-Domar Approach
Model
Introduction to
Linear Growth
Theories
Presented by
Lappang, Klubelle Xerxs B.
Introduction to Linear Growth Theory

• The Linear Growth Theories are heavily inspired by the Marshall Plan.

a. Hailed as one of the great foreign economic policy

achievements of the 20th century.
b. Facilitated the restoration of financial stability and the
liberalization of production and prices.

• The linear stages of growth models are the oldest and most traditional
of all development plans.
02
Rostow’s Stages
of Economic
Growth
Presented by
Lappang, Klubelle Xerxs B.
Rostow’s Stages of Economic Growth

He argued that these

stages follow a logical
sequence; each stage
could only be reached
through the completion
of the previous stage.
Introduction to Linear Growth Theory

Different sectors of the economy:

a. Primary Sector
o Mining and quarrying o Forestry
o Fishing o Hunting
o Agriculture

b. Secondary Sector
o Automobile o Shipbuilding
production o Energy utilities
o Textile
o Chemical engineering
o Aerospace space
Introduction to Linear Growth Theory

Different sectors of the economy:

c. Tertiary Sector
o Retail Services o Insurance and banking
o Transportation and o Healthcare services
distribution o Legal services
o Restaurants
o Tourism
Rostow’s Stages of Development

01.
The Traditional
Stage
 Rostow’s Stages of Development

02. Preconditions
for Take-off
Rostow’s Stages of Development

03.
Take-off
Stage
 Rostow’s Stages of Development

04.
Drive to Maturity
Rostow’s Stages of Development

05.
Age of High
Mass
Consumption
 03
The Harrod-
Domar Model
Presented by
Pelayo, Jennie D.
The Harrod-Domar Model

SOUTH KOREA GHANA

2015 –27, 211 Dollar 2015 – 1381 Dollar

1960 – 156 Dollar 1960 – 186 Dollar

The Harrod-Domar Model

• The Harrod–Domar model is a classical

keynesiyan model of economic growth.
• It is used in development economics to
explain an economy's growth rate in
terms of the level of saving and
productivity of capital.
• The model was developed
independently by Roy F. Harrod in 1939,
and Evsey Domar in 1946, although a
similar model had been proposed by
Gustav Cassel in 1924.
• The Harrod–Domar model was the
precursor to the exogenous growth
model.
The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
1. Saving leads to investment.

S=I

S – savings
I - investments
The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
2. Investments leads to change
in capital stock.

It is a capital accumulated in a
country. Such as equipments,
infrastracture, and other assets
that helps the production.

where;
I – investments
I= k K = change in capital
The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
2. Investments leads to changein capital stock.
Example
Last year: k = 50 million
Current: k = 55 million

Therefore, 5 million is
k=k-k the change of capital.
The result of
k = 55 million – 50 million investment is one of
the assumptions of this
model.
k = 5 million
 The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
3. Capital – Ouput Ratio

Where;

K – Capital
r= K Y – Output / growth rate
Y R = Capital – output ratio
The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
3. Capital – Ouput Ratio
Example:
k = 50 million dollar
y = 25 million dollar

In producing one unit of output

it needs 2 units of capital.
k
r= = 50 = 2
y 25
The Harrod-Domar Model

Three Major
Assumptions of
Harrod-Domar Model
3. Capital – Output Ratio

Note:
• The capital-output ratio is the amount of
capital needed to increase the output.

This is a fixed ratio in this model.

If capital increases, then output also increases.
If capital decreases, then output also decreases.
GROWTH EQUATION

𝑠
Δ 𝑦=
𝑟
Now, let us derive the growth equation:
1. S = I Savings lead to investment
2. I = k Investment leads to change in capital stock

k
3. r = Constant Capital – Ratio Output
y
Now, let us derive the growth equation:
1. S = I Δ𝑘
2. I = k 𝑟=
Δ𝑦
k
3. r = y

Δ 𝑘=𝑟 Δ 𝑦

𝑟 Δ 𝑦 Δ𝑘
=
𝑟 𝑟

Δ𝑘
Δ 𝑦=
𝑟
Now, let us derive the growth equation:

S= I
Δ𝑘
Δ 𝑦=
I = K 𝑟

r =k 𝑠
Δ 𝑦=
A change in output/GDP,
y depending upon the level of
𝑟 savings and capital ratio.
Now, let us derive the growth equation:
Example:
S= I
S = 30
r = 10%

I = K 30 %
=3 %
10
r =k
y
 04
Obstacles and Contraints
to the Harrod-Domar
Model
Presented by
Francisco, Leo-Jay F.
Obstacles and Constraints

Δy=s/r

Δy=s/r
Obstacles and Constraints
Obstacles and Constraints
Obstacles and Constraints
 05
Conclusion and
Criticisms to the
Approach
Presented by
Marmoleno, Lianne Remie Charisse T.
Conclusion and Criticisms
Conclusion and Criticisms