ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Capital Output Ratio (COR) is the amount of capital required to produce one unit of output. It is the relationship between the level of investment made in the economy and the consequent increase in Gross Domestic Product (GDP).

Detailed explanation-2: -It is agreed that capital-output ratio in underdeveloped countries is generally higher, i.e., the capital is less productive in them than in developed countries. This is so because there is a relative inefficiency of the industries which produce capital goods.

Detailed explanation-3: -Thus the capital-output ratio, it is evident, will depend on the rate of interest.

Detailed explanation-4: -If a capital intensive method of production is adopted in the industry, then, proportionately more investment will be needed in the future and vice versa. That is why the capital-output ratio is considered an important concept and analytical tool of both economic growth theory and development planning.