Incremental Capital Output Ratio (icor)

The incremental capital output ratio (ICOR) measures how much more capital is needed to produce one more unit. The incremental capital output ratio (ICOR) is a frequently employed technique for illuminating the connection between the volume of economic investment and the following rise in GDP. ICOR stands for the additional unit of capital or investment needed to generate an additional unit of output.

•    The relationship between the level of economic investment and the rise in GDP is defined by the incremental capital-output ratio (ICOR).

 

•    ICOR measures the marginal investment capital necessary for a nation or other organization to produce the subsequent unit of production.

 

•    Because they show that a country's output is more effective, lower ICORs are favored.

 

•    Because it favors poor nations over industrialized nations that are working at their utmost level feasible in terms of infrastructure and technology use, some ICOR detractors claim that its applicability is limited.

 

•    A developing country can improve its status by utilizing current technology, in contrast to a developed country, which would need to invest more money in research and development (R&D).

 

•    Following are the steps to calculate ICOR:

 

o    Annual Investment / Annual Growth in GDP is known as ICOR.

 

o    Example: The incremental capital-output ratio (ICOR) for Country X is assumed to be 10. Accordingly, a capital input of 10 is needed to produce a 1 increase in output. Furthermore, if Country X's ICOR was 12 the previous year that indicates a rise in the efficiency of its capital allocation.

 

•    Its inability to adjust to the modern economy, which is increasingly driven by intangible assets like design, branding, research and development (R&D), and software that are challenging to quantify or document, is one of its key complaints.

 

•    It is more challenging to include in intangible assets like machinery, buildings, and computers when calculating investment levels and GDP.

 

•    The requirement for fixed asset investments has drastically decreased thanks to on-demand choices like software-as-a-service (SaaS).

 

•    All of this results in enterprises producing more goods that are now expensed rather than capitalized and are therefore regarded as investments. 

 

From the aforementioned illustration, it is clear that factors other than rates of savings and investment can be used to explain why the Indian economy's growth is slowing down. If not, the economy is becoming less effective.