Consider the Harrod-Domar relationship for an economy: g = (s/v)- d
Assume that the depreciation rate is 0.A country can only save 15 percent but wants to grow 15 percent.Assuming the ICOR is 3,the gap of ________ should be provided by foreign aid.

Question

Quizplus · Accepted Answer

Using the Harrod-Domar relationship, we have g = (s/v) - d.
Since the depreciation rate is zero, g = s/v. 
If the country wants to grow at a rate of 15 percent, we have g = 0.15. 
We also know that the country can save only 15 percent, so s/v = 0.15. 
The ICOR is given as 3. 
So, we have g/ICOR = (s/v)/ICOR, which gives us (0.15)/3 = 0.05 as the amount of investment needed to achieve a growth rate of 15 percent. 
However, the country can only save 15 percent, which is not enough to cover the required investment. 
Therefore, the remaining gap of 0.05 should be provided by foreign aid, which is 10 percent of the required investment (0.05/0.15 = 1/3, so 1/3 of the required investment is 0.05, making the total investment 0.15, of which 0.10 is foreign aid). 
Hence, the answer is A) 10 percent.

Consider the Harrod-Domar Relationship for an Economy: G = (S/v)-