This model, developed independently by RF Harrod and ED Domar in the l930s, suggests savings provide the funds which are borrowed for investment purposes. The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to 'explain' economic growth. As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. More physical capital generates economic growth.
Net investment leads to more capital accumulation, which generates higher output and income.
Higher income allows higher levels of saving. The key to economic growth is to expand the level of investment both in terms of fixed capital and human capital. Problems of the model Economic growth and economic development are not the same. Economic growth is a necessary but not sufficient condition for development Practically it is difficult to stimulate the level of domestic savings particularly in the case of LDCs where incomes are low. Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later.