What is ICOR and its role in influencing growth rate?

Question

What is ICOR and its role in influencing growth rate?

Answer 1

incremental capital-output ratio, means under present patterns u r nearing steady state, growth rate slackened, u know it's difficult to get capital beyaong present rates besides such usage may b inefficient,

inflation causes icor to be reported as real r < sometimes even 0; capital being misutilized socially inefficient usage, less growth

Answer 2

ICOR is the abbreviation of Increnental capital output ratio. It is the ratio given by incremental output (Y) resulting from incremental addition to the stock of capital (K). ICOR indicates the amount of additional capital required to generate additional GDP or National Income (Y). To represent symbolically, v = ICOR = DK/DY where D stands for incremental change.

Now we also know that DK is nothing but Investment (I) during a period because it is through investment that the capital stock to produce additional output is made available. So , DK = I.  We also know that in the ex post sense in a closed economy Investment equals Savings(S). So, I = S.

but Saving depend on the level of income ( a percentage of income is saved) and this is represented by the equation S= s.Y where s is the saving rate.

Noe let us see what we have:

v= DK/DY = I/DY= S/DY= sY/DY

by transposing we get  DY/Y= s/v

DY/Y is nothing but the rate of growth of GDP or Income. The final equation says that this growth rate equals s/ v or savings rate divided by the ICOR. The higher the ICOR, the lower is the rate of growth of GDP or the economy. The lower the ICOR the higher will be the economy's growth rate measured by the rate of growth of GDP or income. this is so simple intuitively: given the savings rate, the lower the additional capital required to produce an additional unit of GDP, higher will be the additional GDP generated from the given investment and hence higher trhe growth rate. This is a simplistic version of the Harrod Domar growth model.