How much capital is required to produce one unit of output is termed as capital output ratio or COR. It helps to assess relationship between investment pumped in economy and resultant growth in GDP.
If the capital output ratio is higher, it means that production of outputs isn’t efficient and there is need for policy interventions. But, in case of lower capital output ratio, there is no need to worry.
Meaning or definition of capital output ratio or COR
Capital investment means money used to purchase all the factors of production required to produce units. Like, heavy capital machineries, skills, expertise, technology, raw material, etc.
In simple terms, how much capital is burned to produce one unit you desired, and the ratio between two determines whether the produced unit requires more or less capital.
Clearly, less capital means superior factors of production, and higher output means inferior quality of factors of production.
If the machineries, expertise, and technology is advanced, the output will results in cost effective, competitive in market and possess comparative advantage over opponents.
Examples of capital output ratio
Suppose, in India, to produce one quintal wheat, there is requirement of one thousand rupees, or twelve dollars. But, in Japan, the cost to produce same amount of output requires lesser, and in other countries like less developed, the cost may be higher than India.
What does it mean? It is the difference in technology, machineries, expertise and skills. Better factors of production always results in the higher productivity and cost effective outputs.
Globally, cost effective outputs always preferred due to comparative advantage and consumer surplus. Most of the countries which follows export driven economy like China, Japan etc. pours lots of resources in research and development to upgrade technology and expertise to ensure cost effective mass production.
Incremental capital output ratio or ICOR
The level of investment is required to produce output of units in addition is called incremental capital output ratio. If the capital requirement increases with the extra units of production, the ICOR is higher. It means that the productivity and efficiency is a matter of concern for policy makers.
So, factors affecting ICOR are level of technology, availability of cheap labour and raw materials, Better expertise and skills, and government support.
Concluding remarks
Nowadays, we are in the cutthroat competitive world. Here, everyone wants to capture market power by cost effective outputs and comparative advantage. Obviously, the role of advanced technology, higher levels of expertise and other things play greater role in keeping ICOR less.
This is all about the capital output ratio or COR and ICOR. This is an effective tool to assess the country’s productivity and efficiency. After all, that decides the country’s ability to capture market share.
Q. 1. What is capital output ratio?
In simple terms, how much capital is burned to produce one unit you desired, and the ratio between two determines whether the produced unit requires more or less capital. It is called capital output ratio or COR.
Q.2. What does incremental capital output ratio or ICOR mean?
Ans: For capital output ratio, it is the ratio between produced units and required capital. But, in case of incremental capital output ratio or ICOR is, how much capital is required to produce an additional unit.
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