Question

Despite being a high saving economy, capital formation may not result in significant increase in output due to 

(a) weak administrative machinery

(b) illiteracy

(c) high population density

(d) high capital-output ratio

Answer 1

Correct option is (d) high capital-output ratio

Capital Output Ratio (ICOR) measures the percentage increase in capital formation required obtaining a percentage increase in GDP. Entrepreneurs, by investing their own savings and informally mobilizing the savings of their friends and relatives contribute to the process of capital formation. These informal funding supplements the funds made available by the formal means of raising resources from banks, financial institutions and capital markets. So, "D" is the fitting option- if capital to output ratio is high then capital formation may not result in significant increase in the output.