Despite being a high saving economy, capital formation may not result in significant increase in output due to
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-outputs ratio
Answers
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The relationship between capital and output can be expressed by Incremental Capital Output Ratio (ICOR). ICOR shows how certain amount of capital is being used to produce a single unit of production.
Higher Capital Output Ratio indicates that the economy is inefficient in making best use of capital. It is difficult for that country to produce without higher amount of capital.
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Despite being a high saving economy, capital saving may not result in the significance increase in the output due to the high capital output ratio.
Explanation:
- This ratio establishes a relationship between the capital and the economy.
- If the economic conditions of the country are efficient, then the invested capital will help the country to fulfill the economic needs.
- In this case, the ratio value will be less and if the ratio value is high, then the country will not be able to manage its economic needs.
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