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.
