Friday, October 14, 2016: 2:15 PM
The idea of economic growth began after Keynes' General Theory was widely accepted and understood. It was an extension of the ideas of Keynes. Whereas Keynes' work was concerned with the role of government to achieve full employment when equilibrium income was below that level, the theory of economic growth permitted full employment to be achieved and then raised the issue of how output could continue to grow in a market system once full employment itself had been reached. The first coherent model to describe this idea can be attributed to two early economists, Roy F Harrod (1939) and Evsey Domar (1946). The answer, of course, is to recognize that capital has two sides, a demand side and a supply side. Once investment is achieved and becomes completed capital, it can be productive and so can add to output, provided that additional investment can generate the demand for that output. Their work led to an avalanche of later writers who contributed to the growing literature on economic growth. The work of current growth model theorists is largely mathematical in nature.
This paper seeks to put the Harrod-Domar model back into the construct of the Keynesian geometry that spawned the idea in the first place. After explaining the model, we examine it again via a production possibility curve, via a saving, investment model, via the Keynesian cross approach (C + I diagram), and via the IS, LM description of the economy. These approaches permit a more intuitive explanation of the idea of economic growth and permits students to better understand the importance and relevance of the idea of economic growth.