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Indian Economy / Macro Economic Aggregates

Economic Efficiency of India

The efficiency in the economy can be studied by taking the help of Incremental Capital Output Ratio (ICOR), which is defined as the ratio of number of additional units of capital required to raise the output by one unit.

  • ICOR = Capital / Output

  • ICOR measures the efficiency in the economy. Lesser the value of ICOR, more is the efficiency of the Economy and higher the value of ICOR, the lower will be the productivity of capital employed and hence lesser the efficiency.

  • Efficiency can be increased by increasing GDP or reducing the expenditure.

  • Around 250 inputs are taken for the estimation of ICOR.

  • GDP Growth rate = Investment share in GDP / ICOR. For example, if the share of investment in GDP for a country is 24% over a particular period and if the GDP growth rate is 8% per year during the corresponding period, then the ICOR will be 24/8 = 3.

  • In most of the countries, the value of ICOR will be around 3.