Published Oct 25, 2023 The Incremental Capital Output Ratio (ICOR) is a measure that illustrates the amount of investment required to produce an additional unit of output or economic growth. It is calculated by dividing the total amount of investment by the increase in output. The ICOR is used to evaluate the efficiency of investment and to assess the productivity of capital in an economy. Let’s consider a hypothetical country called Econland, which is an emerging economy. In 2019, Econland’s GDP was $500 billion, and its total investment was $100 billion. In 2020, the GDP increased to $550 billion with a total investment of $120 billion. To calculate the ICOR, we divide the increase in investment ($20 billion) by the increase in GDP ($50 billion). ICOR = Increase in Investment / Increase in GDP This means that in Econland, it took $0.40 of investment to generate an additional $1.00 of GDP or economic growth. The ICOR is an essential measure for policymakers and economists as it provides insights into the productivity and efficiency of investment in an economy. A low ICOR indicates that the economy is generating more output with less investment, indicating high efficiency and productivity. On the other hand, a high ICOR suggests that a significant amount of investment is required to achieve the desired level of output, indicating lower efficiency. By analyzing the ICOR, policymakers can identify areas where investment is effectively contributing to economic growth and areas where it may need to be improved. This helps in making informed decisions regarding resource allocation, long-term planning, and economic development strategies. It also enables comparisons between different countries and assists in identifying factors that affect economic growth and development.Definition of Incremental Capital Output Ratio (ICOR)
Example
ICOR = $20 billion / $50 billion
ICOR = 0.4Why Incremental Capital Output Ratio (ICOR) Matters
Economics