Importance

Thus the objective of capital accumulation,  howsoever important. should not be  very  overstressed. For to gain the most Irum capital formation.  a country must also   undergo technological and organizational  progress. so that the capital may he used more productively. The growth of the rate of output  depends not only on the   mount of capital accumulated  but also on how much capital is required per  unit  increase in output  capital output ratio A low   capital output ratio is. thus. as  significant as capital   accumulation. Hut it must also be pointed out that a low ratio   requires technological and organizational progress. 0 that capital becomes more   productive.

Thus. capital output ratio plays a vital role in  in accelerating economic growth. The  lower the capital output  ratio. more accelerated is the economic growth. The capital output ratio can he reduced by  means or technological  and  innovative  improvements.

Limitations. It may however be pointed out that  the concept of capital output  ratio  suffers from  certain limitations. Its precise calculation presents some formidable   difficulties Hence. the quantitative relationship between capital investment and   output, which the capital-output ratio suggests may prove to be  misleading. It   would.   therefore be hazardous to base the estimates of capital requirements of an industry   economy Oil such ratios Neither can the capital stock  be assessed with any   exactitude nor is the other side of the ratio. output capable of any precise   measurement.  Besides the index number problems a clear  distinction cannot be often made between capital goods and non capital goods. Returns to social overheads in particular cannot be calculated accurately.  Further capital output ratio is   influenced by

tors elude quantitative assessment  890 • Modern Economic Theory Hence the  concept of capital output ratio has only a limited practical significance because it  all not indicate the actual contribution of capital alone in a given scheme of  vestment Great caution is therefore necessary in making use of a particular lat  capital output ratio in the formulation of actual investment policy.