Incremental capital-output ratio

The Incremental Capital-Output Ratio (ICOR) is the ratio of investment to growth which is equal to the reciprocal of 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. It can be expressed in the following formula, where K is capital output ratio, Y is output (GDP), and I is net investment.{{fact|date=February 2023}}

\text{Incremental Capital Output Ratio (ICOR)} = \frac{\Delta K}{\Delta Y} = \frac{\frac{\Delta K}{Y}}{\frac{\Delta Y}{Y}}= \frac{\frac{I}{Y}}{\frac{\Delta Y}{Y}}

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. As an example, if the level of investment (as a share of GDP) in a developing country had been (approximately) 20% over a particular period, and if the growth rate of GDP had been (approximately) 5% per year during the same period, then the ICOR would be 20/5 = 4.{{fact|date=February 2023}}

ICOR, world, and determining variables

File:IQuoteWeltEngl.PNG|Investment share

File:WeltBIPWorldgroupOECDengl.PNG|Rate of GDP growth

File:IcorWorld.PNG|The reciprocal of ICOR

File:MEoC.png|Marginal efficiency of capital as defined in the Ameco data bank of the European Commission for FRG, USA and Japan.

Incremental capital-output ratio

ICOR, world, and determining variables

Further reading