1

A REVIEW ON GROWTH MODELS

Naveen Adhikari
Central Department of Economics
Tribhuvan University
email@nabueco@gmail.com


1. KEYNESIAN GROWTH MODELS
The main attack of Keynesian Macro theory on the classical economics was on the
classicist's proposition that an economy always operate in full employment level and any
distortion there from is subject to automatic correction by the natural forces of markets.
These were explained via the contents of say's law of market and quantity theory of
money, which apparently maintained the consistency in classical macro model given the
greater freedom of the wage price flexibility. Keynes, by switching off the classical long
run analytical framework into short run one, puts it that the existence of such mechanism
is a perfect utopia in the sense that wages and prices are far from being as flexible as the
classicists believed.
The issue is that Keynes did not extend his theory of demand- determined equilibrium
into a theory of growth. This was left for the Cambridge Keynesians to explore. The first
to come up with an extension was Sir Roy F. Harrod who (concurrently with Evsey
Domar) introduced the "Harrod-Domar" Model of growth (Harrod in 1939, Domar in
1946).
A. HARROD GROWTH MODEL
Roy F. Harrod used dynamic approach in formulating the growth of an economy using
accelerator principle and multiplier theory. The dynamic extension of the short run
Keynesian static model aims at explaining the process of equilibrium growth in the one-
sector-one- factor model of an economy. Harrod' s model, through razor's edge balance of
the equilibrium of a growing economy concludes that once the equilibrium of the
economy disrupted the economy persistently moves away from equilibrium violating thus
the classical proposition of automatic movement back to the equilibrium.


Assumptions:
2
1. The state of technology is given and requires that inputs to be used in fixed
proportion. Thus production function is of fixed coefficient type:
Y (t) = min {
| o
) (
,
) ( t K t L
} (1)
where o >0 is labor output ratio and |>0 is capital output ratio i.e. o and |
are the labor and capital required to produce one unit of output.
The iso-quants corresponding to (1) are right angled and production function is
Leontif production function.
It is also assumed that the economy is closed and is producing a single
commodity, which is partly consumed and partly invested.
2. Labor forces grows at an exogenous determined constant exponential rate - ''.
i.e. =
dt
dL
L
1
(2)
dt
L
dL
= ,
if labor is L(0) at t = 0,

] ] ln
0
) (
) 0 (
) (
) 0 ( 0
[ [
t L
t t L
L
t L
L
t
dt
L
dL
=
=
} }

L (t) = L
o
e
t
(3)
Equation (3) gives the size of labor force at time 't'.

3. Investment at any time is explained by the acceleration principle. i.e. investment is
proportional to change in output.
or,
dt
t dY
t I
) (
) ( v =
(4)
where v >0 is the accelerator coefficient. It is also assumed that the capital stock does not
depreciate and there is no technical progress.
4. The society is inclined to save a constant proportion of its output all the time.
3
i.e.
) ( ) ( t sY t S =
(5)
where 0<s<1 is the marginal ( as well as average) propensity to save of
the society during the period 't'.
5. Entrepreneurs are profit maximizers.
Working of the model
Dynamic condition for equilibrium requires that saving equals investment all the time.
Thus,
) ( ) ( t I t S =
(6)
Substitution of saving and investment functions into dynamic condition for equilibrium
gives the first order differential equation with constant coefficient.
i.e.
dt
v
s
Y
dY
=

if income is Y(0) at t = 0 then,
dt
v
s
Y
dY
t Y
Y
t
t
} }
=
=
) (
) 0 ( 0


] [ ] [ln
0
) (
) 0 (
t
v
s
Y
t
t Y
Y
=


e
v
t s
Y t Y ) 0 ( ) ( =
(7)
The solution to Harrod basic equation suggests that if the economy is to remain in
equilibrium, income must grow at an exponential rate of
v
s
. Since 0<s<1 and v>0,
v
s
>0
implying that equilibrium income is monotonically increasing over time i.e. the absolute
change in income must excess the change in income in the past. The time path of
equilibrium level of income is shown in the following diagram:
Y(t) Y(t) = Y(0) e
s/v t




Y(0)

4
0 t

This explosive time path of the Harrod solution has one implication that the equilibrium
of the economy is subject to chronic instability called Razor's edge balance. In order to
demonstrate the instability, Harrod define three types of growth rates explained by
mutually exclusive sets of forces:
a. Actual Growth Rate ( G
a
) : From equation (7), it is obvious that if equilibrium is to
be attained, the growth rate of national income or output must equal to the ration of MPS
(s) to accelerator (v) as times go on. Here, s and v, both are actually determined in the
economy, so the growth rage G
a
=
v
s
is called actual growth rate.

b. Warranted Growth Rate (G
w
): Harrod concept of warranted growth rate is related
primarily to the profit maximizing behavior of businessmen. It is the rate at which
demand is high enough to enable entrepreneurs to sell the goods they have produced. If
this happens, businessmen are happy and they will produce the same percentage rate of
growth.
If v
r
is the required capital-output ration for entrepreneurial equilibrium that maximizes
their profits, warranted growth rate can be written as:
G
w =
s / v
r
(8)
which is the full capacity growth rate of capital. Harrod defined G
w
as: that overall rate of
advance which is executed, will leave entrepreneurs in a state of mind in which they will
be prepared to carry on similar advance.
From equation (7) and (8), the equilibrium condition can be written as:
G
w
=

G
a


v
s
v
s
r
=
G
w .
v

=

s =

G
a
v
r
(9)
which implies that if G
a
=

G
w
v = v
r
i.e. output actually grows at the
warranted rate then actual capital stock will confirm to the desired capital stock and
entrepreneurs would be prepared to carry on the same rate of growth in future.

c. Natural Growth Rate (G
n
): It is the maximum possible growth rate, which is allowed
by existing stock of capital, natural, labor force and state of technology.In the long run,
growth rate of output depends upon the supply of labor. By assumption of constant labor-
5
output ration, the growth rate of output
Y
Y
-
cannot permanently exceed the growth rate of
labor force;
if = =
Gn
dt
dL
L
1

then, G
a
<
L
L
.
=
Thus for full employment G
a
= , but for steady state equilibrium G
w
=

G
a
,. It is
therefore clear that equilibrium steady growth with full employment necessitates that
Gw

=

G
a
= G
n.
If this relation is maintained, then the economy will grow at a constant proportional rate
of
v
s
=
vr
s
= , a situation which Mrs. Robinson has described as 'the golden age' a
mythical state of affairs not likely to obtain in any actual economy. Thus, Harrod model
includes the possibility of equilibrium growth at full employment.

The First Harrod Problem: The Problem of attaining Equilibrium
As
v
s
=
vr
s
= gives the steady state full employment equilibrium; however there is
no reason of attaining this equilibrium. As s, vr, and are all independently determined,
parameters only a 'happy accident' will generate steady state growth at full employment
in the Harrod Model:
: s- is determined by preferences of firms and households
: v
r
- is a reflection of the fixity of technology by assumption
: - is exogenous and determined by biologically determined birth and date
rates
Thus other than accident, there is no mechanism in the Harrod model which would ensure
the attainment of this golden age situation.
This conclusion is thoroughly "Keynesian" in spirit: there is no reason to believe that full
employment growth will be attained. Thus first Harrod problem can be interpreted as a
dynamic version of the central Keynesian allegation that under-employment equilibrium
is possible in a capitalist economy. No automatic adjustment mechanism exists to ensure
the convergence of the two races.

6
The Second Harrod Problem: The Problem of Maintaining Equilibrium
Equilibrium condition is G
w .
v

=

s =

G
a
v
r
. Suppose that G
a
> G
w
, then
v < v
r
, there will be a deficiency of capital which in turn implies that realized
investment falls short of planned investment ( Ex-ante I > Ex-post I). Entrepreneurs
attempt to compensate for the short fall by increasing their equipment orders which
forces G
a
further away from G
w
i.e. G
a
>> G
w
. This situation leads to 'chronic'
inflationary gap.

The exact opposite sequence applies when G
a
< G
w,
then v > v
r
and realized
investment > planned level, entrepreneurs reduces investment level so, G
a
further reduces
leading G
a
<< G
w.
This leads to chronic deflationary gap - businessmen would fail to
sell all that they have produced.
This instability of equilibrium forms the basis of famous long run anomalies: secular
stagnation if G
a
> G
w
and secular exhilaration if G
a
< G
w.

Thus Harrod Conclusion are:
There is a warranted rate of growth in output which once achieve will be
maintained.
If any other rate of growth is attained, then adjustment within the system will
move the rate, not towards but further away from the G
w
i.e. the slightest
deviation of G
a
from G
w
is self-sustaining and self-aggravating and far from
being self-correcting. Thus Harrod model is caused in the Razor's edged or
Knife's edged balance.
G
G
G
n
G
n

G
a

G
w
G
w


0 t 0 t
t
1
t
2
t
1
t
2
G
a
=G
w
7
Figure 1 Figure 2

In figure 1, G
a
= G
w
up to time t. At time t
1
, G
a
exceed G
w,
which makes that business
increase capital stock by investing more the increase G
a
with G
w
unchanged. This wide
the gap between G
a
and G
w
. The economy goes for secular exhilaration or inflationary
gap emerges. In figure-2, G
a
= G
w
up to t point of time. At time t
1
, G
a
falls which
discourage investment that slows down Ga further. This continue till G
a
= 0 at t
2
, from
t
2
onwards, the business realizes that the economy is in a phase of depression or in a
deflationary gap. This makes them reduce the warranted growth rate. At time elapses, G
a
and G
w
fall further and they equal each other only at a negative value. However, since
G
a
= G
w
= , steady-state-full-employment equilibrium is not possible even at the new
rate at which G
a
= G
w.

The strengths:
Though model is subject to chronic instability, it appeared as one of the most significant
contribution to the theory of growth. Firstly, it has taken into account the dynamic
analysis of growth, which becomes one of the prominent tools for the analysis of
equilibrium growth rate at earlier age of Keynesian economics. Due to its simplicities, the
model has gained a wide application in the field of planning. The beauty of the model is
that it has been able to analyze the economic fluctuations in the economy. Harrod asserts
that 'sources of growth generates the forces of cycles, i.e. business cycle - when G
a
=
G
w
, the fluctuations in the economy arise. Many economists criticized the model for its
instability within the model, it is however permits the possibility of attaining full
employment equilibrium. It is possible to control labor force by controlling population
growth and setting up barriers to entry into the labor force. To the extent that this can be
done, the G
a
= G
w
may be institutionally achieved rather than being the result of happy
accident.






8




2. DOMAR GROWTH MODEL

The model:
The supply side:
The capacity of investment is to be measured by the change in the rate of potential output
the economy is capable of producing.
Domar assumes that the amount of output (Y) that the economy can produce is
proportional to the size of the stock of capital. Symbolically,
Y
p
= o K (1)
where: Y
P
is the potential output i.e. maximum output associated with
given stock of capital
o: output capital ratio or capital coefficient and assumed to be constant
K: Stock of capital
Relation (1) is simply the linear production function of the capital alone. The change in
the potential level of output can be determined by differentiating relation (1) with respect
to time 't":

I
dt
dK
dt
dY
s
P
o o = = ) (
(2)
This describes the supply side of the economy.
Demand Side:
The actual level of income (demand effect) at any point of time is explained by a
conventional simple multiplier process i.e.
,
1
I
s
Y = where 0<s<1 is the marginal propensity to consume.
Considering the rate of change of income (output) over the time;

dt
dI
s dt
dY
a
1
= ) (
(3)
9
Equilibrium Conditions:
Equilibrium in the Domar Model is defined as the situations in which the productive
capacity of the economy is fully realized. This would be accomplished when aggregate
demand is equal to the productive capacity i.e.

dt s
I
dI
I
dt
dI
s
dt
dY
dt
dY
P
p
a
o
o
=
=
) ( = ) (
1
(4)
This is the fundamental equation of the model. This equation implies that, as s & o both
are assumed to be constant, the rate of growth of investment that will maintain actual
level of income equal to the maximum potential level of income is a constant
proportional rate of so. That is, growth rate of investment must be so to maintain the
full employment level. Domar indeed opines that not only I, but also all major macro-
economic variables should grow at a constant rate of so to maintain full employment
situation in the economy.
It follows form the homogeneous differential equation with constant coefficient that the
solution would be:
t s
e I t I
o
0
) ( =
(5)
where I
0
is the initial level of investment at the time t =0.
Equation (5) describes the time path of I that ensure the full capacity output level in the
economy. As both s>0, and o>0,giving so >0, the time path depict a monotonically
increasing function i.e. the absolute change in investment must excess the change in
investment in the past. It suggests that investment must grow at an exponential rate of so
to maintain a balance between capacity and demand over time. The time path of
equilibrium level of investment is shown in the following diagram:
Stability Analysis:
The explosive nature of monotonically increasing time path with no inter-temporal
equilibrium in the solution of the differential equation has one important implication on
the Domar model that is characterized by a chronic instability if the required growth rate
of investment differs from the actual growth rate. Consider that actual growth rate of the
10
economy is given by r. In a situation where r = so, there will be the full utilization of the
productive capacity. But for the situation, r = so, then as time elapses there will be either
shortage of capacity or surplus of capacity depending upon the whether r > so or r < so.
In order to describe the phenomenon, Domar defines a coefficient of utilization as:
o o

s
r
e I
e rI
s
dt
dY
dt
dY
t P
t Y
t
rt
rt
P
= = =

=
0
0
1
) (
) ( lim
(6)
That is, when there is discrepancy between r and so, over the times there will be either
shortage of capacity (>1) or surplus of capacity (<1) depending upon whether the
actual growth rate is less or greater than the required growth rate. It is only when = 1,
which ensures the full utilization of the capacity equating the actual growth rate to
required growth rate. It also tells about the demand generating effect and capacity
generating effect of investment over time, under actual growth rate r.
Case I: When r > so
dt
dY
dt
dY
P
> that is, aggregate demand outstrips the productive
capacity; this implies the shortage of capacity which leads to the inflationary pressure in
the economy. To cope with this situation, investors will invest more, which means
increase in r, but r is already more the required growth rate so.
Case II: When r < so
dt
dY
dt
dY
P
< that is, aggregate demand is deficient implying
surplus of capacity leading to deflationary situations. To cope with this situation,
investors will curtail the investment, which means decrease in r, but r is already less the
required growth rate so.
These implies for the paradoxical results within Domar model if entrepreneurs are
allowed to adjust the actual growth r according to the prevailing capacity situations- a
wrong kind of medicine to cure the economy. If investment grows at faster rate then the
required rate (r > so), the end result is shortage of capacity rather than surplus of
capacity. In this case, r > so leads to the shortage of capacity, which motivate investor to
faster the rate of investment resulting into further increase r. In the opposite case, if
investment grows at a slower rate then required growth rate i.e. r< so , the end result is
the excess of capacity rather than shortage of capacity. In case of r < so, the emergent of
excess capacity will lead to slower rate of investment which means a decrease in r instead
of increase in r. The discrepancy between r & so would further intensify rather than
reduced.
11
So given the parametric constraints of s & o, the only way to avoid shortage or surplus of
capacity is to guide investment in such a way that r = so which ensures the full
utilization of capacity. However, this is indeed a remote possibility. This proves that
Domar's model is balanced on Razor's edged or Knife-edged. It is because of the linear
production function Yp = o K, in which the absence of labor in production function
implying that labor and capital are combined in a fixed proportions.










3. SOLOW GROWTH MODEL
Solow's growth model was appeared in 'quarterly journal of economics' vol. 70. 1956
under the title: " A contribution to the theory of economic growth'. Despite the stimulant
roles of Harrod-Domar in reawaking interest in the problems of growth and long run
accumulation, the neo-classical approach to the analysis of a growing economy has
attract considerable interest and enthusiasm such that it can now said to represent the
dominant method of growth economics. This model is considered as the representative
neo-classical model (based on marginal analysis), which accepts all the Harrod- Domar
assumption except that of fixed input propositions.

The goal: the ultimate goal of the model is to show the long run growth stability once
assumption of fixed proportionality of inputs is dropped.

Assumptions:
Only one composite commodity is produced, partly consumed and partly invested.
Factors of productions can be substituted in varying proportion
Technical progress is embodied in capital
12
Production function is supposed to be continuous with constant returns to scale.

The Theme: The economic system does not move to equilibrium situation be chance as
stated by Harrod-Domar. It is the change in the capital-labor ratio that brings about
equilibrium.
Propositions:

1. The production function is homogeneous of first degree with two inputs: labor (L)
and Capital (K).
Y(t) = F [K(t), L(t)] (1)
The production function so defined is twice differential and characterized by the
constant returns to scale, which is obvious under the consideration of the function of
homogeneity of degree one. This production function depicts the positive marginal
product of each input yet law of diminishing returns operates. This gives the special
mathematical feature that F
k
>0, F
L
>0 and F
KK
<0, F
LL
<0.In addition, it has nothing
-from - nothing feature: i.e. F (0,L) = F(K,0) = F (0,0) = 0 implying that positive
level of employment of each of the input is essential for the production of some
positive output.
Since the production function is linearly homogenous, it can be written as function of
capital labor ratio only;
) 1 , (
L
K
F
L
Y
=

) (
) 1 , (
k |
k
=
=
L
Y
F
L
Y

) (k | L Y =
, (2)
Where
L
K
= k
(2.a)
In view of the assumed sign of F
K
and F
KK,
the newly introduced | function must be
characterized by positive first order derivative and negative second order derivative i.e.
o and < >
| |
kk k
0 .

13
2. Labor forces grows at an exogenous determined constant exponential rate - '' from
its time-zero level of L
0
.
i.e. =
dt
dL
L
1

dt
L
dL
= ,
if labor is L(0) at t = 0,

] ] ln
0
) (
) 0 (
) (
) 0 ( 0
[ [
t L
t t L
L
t L
L
t
dt
L
dL
=
=
} }

L (t) = L
0
e
t
(3)
Equation (3) gives the size of labor force at time 't'.

3. Saving is considered to be increasing function of income. Any saving during time
period 't' is some proportion of the current income. That is,

) ( ) ( t sY t S =
(4)
where 0< s < 1 and s is the marginal propensity to save ( and is equal to average
propensity to save).

4. Investment is simply the rate of increase of the capital stock of the composite
commodity.

.
) ( K
dt
dK
t I = =
(5)
It is assumed the capital does not depreciate during the given period and thus has been
excluded while defining the investment -capital stock relationship.

The model

Given the proportional saving function ) ( ) ( t sY t S = and investment as change in capital
stock
.
) ( K
dt
dK
t I = =
, the equilibrium necessitates the saving to be equal to the
investment; S (t) = I (t)
14
Thus at equilibrium we have, ) (
.
t sY K = . It follows form equation (2),
) (
.
k | L K = (6)
L in equation (2) stands for total employment as it appears in the production
function whereas the L given by relation (3) is the supply of labor in the market.
Labor market to be equilibrium that ensures the full employment of available labor
requires the labor demand to be exactly equal to the labor supply. That necessitates
L (t) = L
0
e
t
. From relation (6), we have;

) (
0
.
k |

e
t
sL K =
(7)
which is a differential equation in the single variable K which determined the time
path of capital accumulation that must be followed if all available is to be
employed.

Fundamental Equation:
We have form relation (2.a)

e L
t
K
L K
L
K

k
k
k
0
=
=
=

Differentiating with respect to time,

.
0 0
.
0
0
) (
k k
k
k

t
t
t
t
e L L K
dt
d
L
dt
L d
dt
dK
e
e
e
+ =
+ =


Substituting in equation (7), we have,

k k | k
k | k k
k | k k

=
= +
= +
) (
) (
) ( ] [
.
.
0
.
0
s
s
e sL e L
t t

which is the Solow's fundamental equation- a differential equation involving capital
labor ratio only.
15
Solow interprets this equation as: the rate of change of the capital labor ration is the
difference of two terms one representing the increment of capital ) (k | s and one the
increment of labor k . The economic meaning of the first term is clear- average saving
per head, however, the term k has no such simple and direct economic meaning. Some
mathematical manipulation gives
k |
k
k
= ) (
.
s
k
which can be interpreted
quite simply: the capital -labor ratio k will rise if the rate of growth of investment (=s) in
relation to the capital stock exceeds the proportional growth rate of labor force. Thus
) (k | s : Saving per worker/ Investment per worker
k : the amount of investment that would be required to keep the
the capital labor ratio constant given that labor force is growing
at a constant proportional rate .
Thus, the rate of change of capital-labor ratio k is determined by the difference between
the amount of saving (and investment) per worker and the amount of investment required
to keep the capital labor ratio constant as the labor force grows.
This relationship is depicted graphically in panel (a) of figure 3.1. It draws both right
hand components of fundamental equation against k. Here two k values k =0, and k =k*
renders
.
k . The former says that the stock of capital is zero and by nothing-from-nothing
property output also equals zero for k =0.
For
.
k =0, k must be constant that capital stock must be expanding at the same rate as the
labor force, namely . At this point, the line k intersects the curve ) (k | s . By the
constant returns to scale, real output will also grow at the same rate .






.
k



k
) (k | s


A
16



k* k

Stability Analysis
Consider the case if k = k*, then following case arises:
Case I: If k > k*, then, k > ) (k | s and consequently
.
k <0. That is capital labor ratio
will be decreasing over the time - k will decreases towards k*. This means that labor
force will grow faster than the capital.
Case II: If k < k*, then, k < ) (k | s and consequently
.
k >0. That is capital labor ratio
will be increasing over the time - k increases towards k*- the capital will grow faster
than the labor force does.
Thus the equilibrium value k* is stable. Whatever the initial value of k, the system will
move toward the equilibrium path indicated by point A.
The important postulate under neo-classical growth model is that steady equilibrium
growth occurs at the natural growth rate . Only one meaningful growth path exists and
along it labor remains fully employed and capital operates at its full capacity. It follows
from production function that output must grow at the same rate as labor and capital
grows-. As all relevant variables grow at an identical rate, it is called a steady state,
which is a generalization of stationary state.

Technological Progress:
Consider the production function with technology;
i.e. Y(t) = T(t) F [K(t), L(t)]
where T(t) is some measure of technology and is an increasing function of time i.e.
0
) (
>
dt
t dT
. With the technology introduced on production function, a greater output
would be enjoyed even at the same level of the capital labor employment. This results
into the upward shift of the ) (k | s function. This gives the larger value of equilibrium k*'
resulting form the intersection of ) (k | s and k at higher level. Thus with improved
technology, productivity can be increased in a succession of steady state.
Therefore, larger amount of capital will be available to each representative worker in the
economy with a rise in productivity thus, the assumption that technologies embodied with
capital.

17
Change in MPS (s):
When mps (s) increases, the ) (k | s curve shifts upward as in case of the technology-
giving rise to higher level of k*'.
In these both cases, the growth rate of the economy does not change. Hence it is an
exogenously determined and does not depend upon the proportion of income saved and
technological progress. Hence, increase in mps does increase the long run level of output
and income per worker but the long run growth rate is totally unaffected by the
propensity to save.

Summary:
The long run rate of growth of the capital stock and national income is the rate of
growth or the labor force, which is assumed to be an exogenous constant .
The economy invariable tends to a balanced growth path whatever the initial
capital labor ratio.
Output per worker, Capital per worker and Consumption per worker are all
constant in the long run.
Changes in s and technology do not produce any change in the long run rate of
economic growth.



Harrod-Domar Problem with Solow's Model:
Let us recall that the Harrod-Domar (Harrod?) problem exhibited two knife-edges: the
balance between the actual and warranted rates of growth ("macroeconomic stability")
and the balance between warranted and natural rates of growth ("employment stability").
The Solow model does not address macroeconomic stability but only employment
stability.
The question of macroeconomic stability is ignored in Solow by the assumption that
planned investment equals planned savings at all times. No consideration whatsoever is
paid to the underlying "macroeconomic" adjustment process that makes this true. But the
"knife-edge" Harrod and Domar focused on was precisely that one. As Frank Hahn notes:
"It will be noted straightaway that [Solow's] argument has no bearing on Harrod's
knife-edge claim. Harrod had not proposed that warranted paths diverge from the
18
steady state but that actual paths did. The latter are neither characterized by a
continual equality of ex ante investment and savings nor by continual equilibrium
in the market for labour. Thus although Solow thought he was controverting the
knife-edge argument he had only succeeded in establishing the convergence of
warranted paths to the steady-state." (F.H. Hahn, 1987)
The intricacies of macroeconomic adjustment, explicit theories of interest and
expectations, which were the main concerns of Harrod and Domar, are completely
missing in Solow-Swan. And the cost of ignoring them is high. As Frank Hahn (1960)
has himself demonstrated, when even the slightest attention is paid to the underlying
macroeconomic adjustment of a Solow-Swan model in a proper manner, the stability of
its steady-state can be cast into serious doubt. Thus to sum up:

1. The first Harrod-Domar problem- the problem of attaining equilibrium- is
removed by the assumption of variable capital output ration together with
perfect factor markets.
2. The second Harrod-Domar problem- the problem of maintaining
equilibrium- is by passed as a result of the absence of an independent
investment function.
Acknowladgement
I am really indebted to Late Mr. Nawa Raj Nepal, my guru and then young blood at
Central Department of Economics, Tribhuvan University, Kirtipur, Kathmandu for his
comments and suggestions on this paper.












19