Incremental Capital-Output Ratio (ICOR)

The Incremental Capital-Output Ratio (ICOR) is an economic metric that measures the amount of additional capital required to produce an additional unit of output. It is used to assess the efficiency of capital investment in driving economic growth. A lower ICOR indicates higher efficiency, meaning less capital is needed to increase output, while a higher ICOR suggests inefficiency. ICOR is particularly useful in analyzing the effectiveness of government policies and investment strategies in developing economies.

Example

If a country invests $100 billion in capital and generates $10 billion in additional output, its ICOR would be 10, meaning it requires $10 of capital to produce $1 of output.

Key points

• Measures the efficiency of capital investment in producing additional output.

• Lower ICOR indicates higher investment efficiency, while higher ICOR suggests inefficiency.

• Commonly used in assessing the effectiveness of investment strategies and economic policies.

Quick Answers to Curious Questions

Why is ICOR important in economic analysis?

ICOR helps policymakers understand how efficiently capital is being used to generate economic growth and can inform investment decisions.

What does a high ICOR indicate?

A high ICOR suggests that more capital is needed to generate additional output, indicating inefficiency in capital investment.

How can countries improve their ICOR?

Countries can improve ICOR by investing in more productive technologies, improving infrastructure, and implementing policies that enhance capital efficiency.