Solving Harrod Puzzle And Analyzing The Evolutionalry Law Of Domestic Demand Structure In China

Harrod model plays a key role in the developing process of macroeconomics. Up to now, economists ponder over and discuss two basic puzzles in Harrod Model, namely Unbalanced Economic Growth puzzle and Knife Edge problem. Plenty of original benchmark models in modern macroeconomics are built to solve these two puzzles in Harrod model or to describe some phenomena in Harrod model, in which the most famous work is Solow Model. The reason is that some unavoidable basic features are presented in Harrod model. For an example, Unbalanced Economic Growth puzzle discloses the inconsistency between the steady state in commodity market or capital market and labor market while Knife Edge problem discloses the instability in macroeconomic system. Although economists have tried many kinds of methods to solve the basic puzzles in Harrod model, they either changed the foundamental assumption or structures of Harrod model or cannot solve these two basic puzzles completely, which leave much room for further exploration.The main work of this paper is to reexpress and sovle these two basic puzzles in Harrod model, and then build a complete Harrod model to reflect China economy under Keynesian-Harrodian assumptions which are price is sticky and output is decided by demand side. For solving Unbalanced Economic Growth puzzle, dynamics in labor market are descriped detailedly in this paper. After the relationship between employment rate and investment rate are introduced to our model, we can find that they can reach the steady state at the same time. Therefore, the inconsistency between employment rate and investment rate is eliminated. As a result, the economy is in a balanced growth path. Additionally, as the stability mechanism, price function and wage function are introduced into our model in this paper to enhance the stability of macroeconomic system. Therefore, Knife Edge problem can be solved. It is worthy to note that all behaviour functions used by our paper have microfoundations.In view of economic reality, we can find that developing countries are more suitable to Harrod model, compared with developed countries. The main economic feature of developing countries is concluded as dual economy in which the modern department and backward department coexist. During the process of labor transision from backward department to modern department, labor supply is unlimited for modern department. The initial conditions for the fact that the economy in developing countries is catching up with and even surpassing that in developed countries have some relationship with this main feature. When dual economy exists, markets are not clearing. If markets are not clearing, price will be sticky, rather than fully elastic. Therefore, it is easy to know that those economic theories based on clearing markets neglect the main feature of developing countries. However, this is Keynesian-Harrodian assumption, which is the reason why developing countries are more suitable to Harrod model than developed countries.In the view of economic features of developing countries, especially those in China, a Harrod model is built in this paper to explain the law of economic development and forecast the trend of economic development. Specificly speaking, the law of structures of domestic demand evolution is analyzed in this paper, in eluding the law of wage share in national income evolution from the view of functional income distribution. It can be imagined that wage rate stay in the low level because of the umlimited labor supply in economy. At this time, the achievement of economic development is transformed to profit. The manifestation is that wage share declines. Because wage income is the main power for consumption, consumption share in GDP will decline, too. Meanwhile, investment share in GDP will rise. In view of economic reality, these phenomena are the problems faced by China, such as the worsening income distribution, consumption insufficiency and surplus investment. As the economy develops, surplus labor supply will disappear, and wage rate will be sensitive to change in demand or supply in labor market. As a result, wage share will rise, income distribution will be improved, consumption share in GDP will also rise and investment share in GDP will decline step by step. All the above conclusions can be proved by our model in this paper. That is to say, Harrod model not only explain the structure development of demand but also reexplain Kuznets Curve from the perspective of functional income distribution. All in all, as the economy develops, wage share in national income and consumption share in GDP will decline and then rise, which is a U shape, while investment share in GDP will rise and then decline, which is a inverted U shape.