Question
Consider the following statements regarding Incremental Capital Output Ratio (ICOR):
Select the correct answer using the code given below:
- It shows how efficiently capital is being used to produce output
- It is the extra unit of capital required to produce one additional unit of output
- It is the extra unit of output produced from one additional unit of capital
- It is the ratio of change in capital to change in output
Select the correct answer using the code given below:
Answer: Option A
Answer: (a)
Incremental Capital Output Ratio (ICOR) is defined as:-
ICOR = $\text"change in capital"/\text"change in output" = \text"(change in capital/output)"/\text"(change in output/output)" = \text"investment % in GDP"/ {% \text"change in GDP"}$
ICOR represents how much extra unit of capital is required to produce one additional unit of output. It basically represents the (inverse of) efficiency of the new capital. Hence, statement (iii) is false. “Basically, capital/output ratio represents (average) productivity and ICOR represents (marginal) productivity.”
So, if ICOR of India = 5 or (5/1), then India requires Rs. 5 of additional capital goods to produce Rs. 1 of extra output.
If our ICOR is 5 and we want a growth of 8% in GDP then we will have to do 40% investment.
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Answer: (a)
Incremental Capital Output Ratio (ICOR) is defined as:-
ICOR = $\text"change in capital"/\text"change in output" = \text"(change in capital/output)"/\text"(change in output/output)" = \text"investment % in GDP"/ {% \text"change in GDP"}$
ICOR represents how much extra unit of capital is required to produce one additional unit of output. It basically represents the (inverse of) efficiency of the new capital. Hence, statement (iii) is false. “Basically, capital/output ratio represents (average) productivity and ICOR represents (marginal) productivity.”
So, if ICOR of India = 5 or (5/1), then India requires Rs. 5 of additional capital goods to produce Rs. 1 of extra output.
If our ICOR is 5 and we want a growth of 8% in GDP then we will have to do 40% investment.
Was this answer helpful ?
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