Page 34 - Azerbaijan State University of Economics

Turaj Musayev: The Oil Boom in Azerbaijan and Modeling of Economic Growth in Post-Oil Era

economist U. Cevan. Initially, the wave of economic growth was explained by price
dynamics, but later the economic growth was linked with the rate of debt. The
“multiplier and accelerator interaction models” of Nobel Prize winners in economics
Paul Samuelson and Hicks, have for the first time given an analytical explanation of
the upward and downward trends in economic growth.

Existing economic growth models have certain deficiencies. Causes of economic
growth levels among countries have not been fully explained in the assessment of
economic growth models. However, each economic growth model allows the
analysis certain aspects of economic growth for individual economies.

3. NEO-KEYNESIAN ECONOMIC GROWTH MODELS
Domar-Harrod's economic growth model is considered to be neo-Keynesian growth
model. The early stage of this model was established by English economists Evsey
Domar and Roy Harrod. The simplest form of the economic growth model is E.
Domar’s model. The Domar’s model is based on the fact that there is an abundance
of supply in the labor market, which implies the stability of the price level. Harrod's
economic growth model consists of three parts: Fundamental Equality of Growth,
Guaranteed Growth and Natural Growth. In general, when considering the model, it
can be shown that if the actual and guaranteed growth takes a cyclical form, then it
will result in chronic unemployment. Harrod's model presumes the periodic
instability of the market economy. E. Domar figured out a balanced growth
equilibrium, independently, in line with Harrod's first guaranteed growth
equilibrium. In the Domar model, it is assumed that investment plays a dual role in
the economy: First, it creates production tools and then it creates demand by the
multiplier effects. Domar shows that in order for growth in demand to be in line with
the growth of productive forces, investment should be equal to the product of return
on investment and the rate of savings in the steady state growth situation. R.F.
Harrod’s “guaranteed” growth rate assumes full capitalization but not full-fledged
employment. Harrod has also brought the concept of “natural” growth rate to the
discussion. Natural growth is explained as the maximum rate allowed by population
growth and technical progress. Harrod considered a steady increase in production
and labor productivity, which is sustained by the ever-growing population as the
only factor of growth. As a third factor, he specifically mentioned the savings of
capital. This specific tenet of Harrod was of particular importance. Harrod noted that
the market economy was not self-regulating, and the state control was essential for
its regulation. At present, the western countries have no economic development
basis for growth because productivity per capita is high at the expense of scientific
and technical achievements. The constant fluctuation of the economy's balance is

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