Imagine a Harrod-Domar setup. Suppose that a developing country's capital-output ratio (k) is 4, and the savings rate (s) is 12%. Depreciation is 1%, and the population growth rate is 2%.
a. What will be the equilibrium growth rate of GDP?
b. What is happening to living standards in this country?
c. Suppose the country wanted to achieve a growth rate of 3%. With this target, what would happen to the standard of living? Would a growth rate of 3% be possible with the country’s conditions? What would be the financing gap?
d. Suppose the country’s GDP were $12 billion. Express the financing gap in monetary terms.
e. What does the Harrod Domar model assume regarding a country’s production function? How is this assumption different from the Solow model’s?
f. What are the main strengths and the main drawbacks of the Harrod Domar model?