ABSTRACT
An economic model is a simplification of reality that captures a complex process to explain an outcome, economic growth. The model will be useful or not depending on the realism of the assumptions made about the processes at work and the capacity to replicate observed growth and predict future growth. Theory and theoretical derivations play a fundamental role in securing rigor in economic reasoning and in tracking the implications of the assumptions made. The Harrod–Domar model was developed in the 1930s and 1940s following the Great Depression and used extensively in the 1950s, the early years of development economics, when the main objective of development was to accelerate gross domestic product growth. Its purpose is to show how capital accumulation sustains growth and how savings and technology determine capital accumulation. Centrally planned economies, like the Soviet Union, but also Egypt and India, looked at the economy as composed of two sectors: a capital goods sector and a consumption goods sector.
