The Harrod-Domar model is a growth model that explains how an economy's growth rate depends on the level of savings and the capital-output ratio. It was developed by Roy Harrod and Evsey Domar. Put simply......

• Low savings rates in an economy cause low levels of capital investment which leads to low levels of economic growth and development
• Conversely, increasing savings rates in an economy, cause increased capital investment which leads to increasing levels of economic growth and development. 

The Harrod-Domar model can be used to explain economic growth in developing countries such as Kenya which has a low savings rate. In 2019, Kenya's savings rate was estimated to be around 15%. The capital-output ratio in Kenya is also relatively high, estimated to be around 4. This means that Kenya's economic growth rate is relatively low, around 3.75% per year.  Note, as A level economists you are not required to make these calculations, rather you will focus on the principles of the model to illustrate economic writing.

What information does the Harrod Domar model give us?

The Harrod-Domar model can be used to help policymakers in Kenya to increase the country's economic growth (and therefore economic development). There are two main ways to do this:

• Increase the savings rate. This can be done by encouraging people to save more money, or by providing tax breaks for savings or providing the infrastructure to allow saving.
• Reduce the capital-output ratio. This can be done by improving the efficiency of capital investment, or by investing in more productive capital goods.  This means that each $ invested in capital produces increased $s of production.

The Harrod-Domar model is illustrated in the diagram below

The Cyclical Harrod Domar Model