Harrod–Domar Formula for Two-Sector Growth Models

In this paper, the much-celebrated Harrod–Domar model is extended to include a non-consumable capital good. Here, the growth rate of capital is directly proportional to the saving rate and inversely proportional to the weighted harmonic mean of capital-output ratios of the two sectors. Moreover, our formula includes differential prices for the two goods. Further, here, besides flexible prices, capital-output ratio can be made a variable, more like the Solow model, for the consumer goods sector helping to balance savings and investments avoiding the famed knife-edge problem. As opposed to Piketty’s neoclassical critiques, our model can provide explanations for possible direct relationships between wealth-income ratios on one side, and interest rate and rent on the other, and help to confirm the possibilities of his well-known empirical observations.