Keynes in his General Theory was co

Keynes in his General Theory was concerned with the determination of income and employ­ment in the short run. He explained that since in the short-run situation of developed capitalist economies aggregate demand was deficient in relation to the aggregate supply of output, the equilib­rium will be established at less than full employment level.

Since the propensity to consume (and therefore saving propensity) is given and remains constant in the short run, if the amount of invest­ment as determined by expected rate of profit and the market rate of interest is not equal to the amount of saving at the full-employment level of income, the economy will be in equilibrium at less than full capacity level (i.e. less than employment level) of output.

He did not go into the question of the long-run growth of the economy. In fact, he overlooked the effect of investment in a given period on the increase in productive capacity. However, investment has a dual effect.

Firstly, investment increases aggregate demand and income of the people through the multiplier process, and secondly, it raises the productive capacity of the economy through the addition it makes to the stock of capital. Indeed, investment by very definition means the addition to the stock of capital. While Keynes took into account the demand effect of investment, he ignored the capacity effect of investment.

Harrod and Domar extended the Keynesian analysis of income and employment to long-run setting and therefore considered both the income and capacity effects of investment. Harrod and Domar models of economic growth explained at what rate investment should increase so that steady growth is possible in an advanced capitalist economy.

In the growth models of Harrod and Domar, the rate of capital accumulation plays a crucial role in the determination of economic growth. The problem of present-day mature economies lies in averting both secular stagnation and secular infla­tion.

It was the pioneer works of Harrod and Domar that set the ball rolling in regard to this issue, i.e., the maintenance of steady growth in advanced industrialised countries. The Harrod and Domar models seek to determine that unique rate at which investment and income must grow so that full employment level is maintained over a long period of time, i.e., equilibrium growth is achieved.

Harrod and Domar developed their models of steady growth quite separately, though Harrod published his theory earlier than Domar. Although their models of steady growth differ in details, yet the underlying basic idea is the same. Both of them assigned to capital accumulation a crucial role in the development process.

But they emphasised the double role of the investment process, viz., generating income (increasing demand) and adding to the productive capacity of the economy. The classical economists confined their attention to the capacity side only, whereas the earlier Keynesian economists studied the problem of demand only whereas Harrod and Domar consider both sides.

They start with full employment equilibrium level of income. According to them, to maintain full employment equilibrium, demand (total spending) generated by investment must be sufficient to be the additional output caused by this investment. To ensure steady growth with full employment the absolute amount of net investment must keep increasing and there must also be continuous growth of real national income.

Because if demand and income did not increase while annual invest­ment went on occurring, the additions made to the capital stock would remain un-utilised and also employment could not be provided to the growing labour force which would result in unemploy­ment of these two major resources. Obviously, such a situation is not conducive to steady economic growth.

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Keynes in his General Theory was concerned with the determination of income and employment in the short run. He expLAineD that since in the short-Run situation of developed capitalist economies Aggregate demand was deficient in relation to the Aggregate Supply of output, the equilibrium Will be established at Less than full Employment level. Since the propensity to consume (and Therefore Saving propensity). is given and remains constant in the short run, if the amount of investment as determined by expected rate of profit and the market rate of interest is not equal to the amount of saving at the full-employment level of income, the economy will be in. Less than equilibrium at full capacity level (IE Less than Employment level) of output. He did not Go Into the question of the growth of the long-Run Economy. In fact, he overlooked the effect of investment in a given period on the increase in productive capacity. However, has a dual Investment Effect. Firstly, Investment Aggregate demand increases and income of the people MULTIPLIER Through the Process, and Secondly, it raises the capacity of the Productive Economy Makes it Through the addition to the Stock of Capital. Indeed, investment by very definition means the addition to the stock of capital. While Keynes took Into Account the Effect of Investment demand, He ignored the capacity of Investment Effect. Harrod Domar and Extended Analysis of the Keynesian income and Employment and to long-Setting Run Therefore considered both the capacity and income effects of Investment. Harrod and Domar models of Economic growth expLAineD at what rate Investment should increase so that steady growth is possible in an Advanced capitalist Economy. In the growth models of Harrod and Domar, the rate of Capital accumulation plays a CRUCIAL role in the determination of Economic growth. . Problem-Day mature economies of the present Lies in averting both Secular Secular Stagnation and inflation. It was the PIONEER works of Harrod Domar and that the SET Ball Rolling in Regard to this Issue, IE, Maintenance of steady growth in the industrialized countries Advanced. The Harrod and Domar models Seek to Determine that Unique rate at which Investment and income must Grow so that full Employment level is maintained over a long period of time, IE, equilibrium growth is achieved. Harrod and Domar developed their models of steady growth quite separately. , though Harrod published his theory earlier than Domar. Although their models of steady growth differ in details, yet the underlying basic idea is the same. Capital accumulation both of them assigned to a CRUCIAL role in the Development Process. But they emphasized the double role of the Investment Process, viz., Generating income (increasing demand) and adding to the capacity of the Productive Economy. The Classical economists confined their Attention to the capacity Side only, whereas the earlier Keynesian economists studied the Problem of demand whereas only Harrod Domar and consider both sides. They Start with full Employment equilibrium level of income. According to them, to maintain full employment equilibrium, demand (total spending) generated by investment must be sufficient to be the additional output caused by this investment. To ensure steady growth with full Employment the Absolute amount of .NET Investment must Keep increasing and there must also be continuous growth of Real National income. Because if demand and income did not increase while Annual Investment went on occurring, the additions Made to the Capital Stock. would remain un-utilised and also employment could not be provided to the growing labour force which would result in unemployment of these two major resources. Obviously, such a situation is not conducive to steady economic growth.