Capital-output ratio

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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The ratio of the capital used in a process, a firm, or an industry to output over some period, usually a year. This ratio for any process depends on the relative cost of different inputs. Where technology makes alternative techniques feasible, firms usually choose the cheapest, so capital-output ratios tend to be high when capital is cheap relative to other inputs. For a firm or an industry, the capital-output ratio will depend on the mix of different outputs produced and different processes used. The capital-output ratio can be measured as an average ratio, comparing total capital stock with total output, or as a marginal ratio, comparing increases in capital used with increases in output. Both average and marginal capital-output ratios are taken to refer to normal levels of working: when output is abnormally low during a recession, the average capital-output ratio is unusually high, but the marginal capital-output ratio is unusually low.

Reference: Oxford Press Dictonary of Economics, 5th edt.