Incremental capital-output ratio

The Incremental Capital-Output Ratio (ICOR), is the ratio of investment to growth which is equal to 1 divided by the marginal product of capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. In most countries the ICOR is in the neighborhood of 3. It is a topic discussed in Economic growth.

\text{incremental capital output ratio} = \frac{\Delta K}{\Delta Y} = \frac{\frac{\Delta K}{Y}}{\frac{\Delta Y}{Y}}= \frac{\frac{I}{Y}}{\frac{\Delta Y}{Y}}

K: capital output ratio
Y: output (GDP)
I: net investment

According to this formula the incremental capital output ratio can be computed by dividing the investment share in GDP by the rate of growth of GDP.

ICOR, world, and determining variables

Further reading



This article is issued from Wikipedia - version of the Wednesday, February 17, 2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.