Capital output Ratio Criterion

An investment criterion that has often been advocated by various economists is that of capitalization ratio. That is. in choosing among investment projects and in determining priorities. capital output ratios of different investment projects be compared. Those investment projects (or their technical forms) should be selected that minimize the capital- output ratio. If capital-output ratio of investment is less than the capital-output ratio of investment then, in developmental planning, investment. A must get priority over investment B.

Capital output Ratio Criterion

Capital output Ratio Criterion

The underlying assumption of this criterion is that products in which capital investment is to be made arc substitutes of each other. If every project is a substitute of every other, there is no reason why we should not prefer a low marginal ratio of capital to net output. The classic case of sustainability is provided by the problem of choosing between alternative techniques to produce the same commodity. Various examples can be given of it. Additional food grains production can be had either from constructing major irrigation works or by building small irrigation works or by producing and using more fertilizers. Electricity can be produced either by thermal projects or by  a projects. Further, more cloth can be produced either in the hand loom (khaki-cloth) sector or in the mill see tor (mill-cloth). We select a project with a lower capital- output ratio.

Again, what should be compared in c n among investment projects is not their capital output ratio . but their contribution to income during a uric I period. The goal of development policy i the ma mum output at a point or Lillie but rate of growth over time.

Moreover, capital-output ratio may be one of the criteria when substitutes are involved, but it is nut the sole criterion. There arc many other considerations too, such as the labor-investment ratio and the effect of investment on income distribution. In a developing country like India, where fuller employment and better distribution of income at wealth are also the cherished aims of the Five-Year Plans, these other considerations of any investment project arc of paramount importance.