It is used in development economics to explain an economy's growth rate in terms of the level of saving and of capital.
[4] Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution[5]—and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.
Actual growth is the real rate increase in a country's GDP per year.
Domar proposed the model in the aftermath of the great depression, intending to model economies in the short-run, during a period where there is high enough unemployment such that any additional machine may be fully utilized by labor.
[8] Although the Harrod–Domar model was initially created to help analyse the business cycle, it was later adapted to explain economic growth.
The model concludes that an economy does not "naturally" find full employment and stable growth rates.
The main criticism of the model is the level of assumption, one being that there is no reason for growth to be sufficient to maintain full employment; this is based on the belief that the relative price of labour and capital is fixed, and that they are used in equal proportions.