Question

Consider the following statements. The knife-edge problem in the Harrod-Domar growth model implies a constant

1. Rate of population growth
2. Output
3. Rate of saving
4. Capital-output ratio

• A. iv only
• B. All
• C. iii only
• D. i, iii, iv

Answer 1

Answer:

D. i, iii, iv

• In the Harrod-Domar growth model, the "knife-edge problem" refers to a situation where the economy's actual rate of saving is just enough to maintain its current level of output without causing either an increase or a decrease in the level of unemployment.
• It represents a delicate balance where any slight change in the rate of saving can lead to instability in the economy.

Rate of population growth

• The Harrod-Domar growth model typically assumes a constant rate of population growth.
• This means that the population is growing at a fixed rate over time.
• The knife-edge problem doesn't directly address population growth, but it assumes that the population is growing at a constant rate as part of its basic framework.

Rate of saving

• The knife-edge problem is primarily concerned with the balance between the rate of saving and the rate of investment in an economy.
• It implies that the rate of saving is just enough to cover the rate of investment required to maintain the current level of output and employment.
• If the rate of saving were higher, it could lead to overinvestment and economic instability.
• Conversely, if the rate of saving were lower, it could lead to underinvestment and economic instability.

Capital-output ratio

• The knife-edge problem indeed implies a constant capital-output ratio.
• In this situation, the rate of saving matches exactly with the capital-output ratio required to maintain the current level of output.
• Any deviation from this precise balance can lead to instability.
• If the capital-output ratio were higher or lower than what is required, it would disrupt the equilibrium and result in either underutilization or overutilization of resources.