Capital-output ratio, incremental (I.C.O.R.)

Updated: Aug 20, 2021

The increase in the capital stock of a firm, industry or economy over a period, divided by the increase in output over that period. It is the ratio of net investments to change in output. For a given increase in output; the size of the change in capital stock will be determined by technological conditioiis and relative factor prices, e.g. the higher the wages and the lower the rate of interest, the greater the net investment for a given increase in output. If the I.C.O.R. can be taken as roughly constant over a particular period, then multiplying it by the expected change in output gives the expected level of net investment, and this fact leads to the accelerator theory of investment wiih the I.C.O.R. identified as the accelerator coefficient. Accordingly I.C.O.R.s play an important part in the theories of the trade cycle and economic growth. I.C.O.R.s are frequently used by economists in analysing the relative growth experience of different countries. In these cases, figures of percentage increases in gross investment from national accounts data are used and divided by the percentage increase in gross national product. Such a ratio is more properly called a gross. incremental capital-output ratio. One other related ratio is the average capital-output ratio, in which the total depreciated capital stock is divided by total output.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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