Despite being a high saving economy, capital formation may not result in significant increase in output due to
- (a) weak administrative machinery
- (b) illiteracy
- (c) high population density
- (d) high capital-output ratio ✓ UPSC's answer
Why the answer is (d)
• The capital–output ratio (ICOR) measures how much capital is needed to produce one additional unit of output.
• A high capital–output ratio means investment is inefficient — much capital yields little output — so even a high-saving economy sees little growth from its capital formation (Harrod–Domar: growth = savings rate ÷ ICOR) — option (d).
• Weak administration (a), illiteracy (b) and population density (c) may affect efficiency but are captured in economics through the ICOR.
• Hence option (d).
Why the other options are wrong
- (a) weak administrative machinery
- Administrative weakness is not the economic explanation.
- (b) illiteracy
- Illiteracy is not the direct link between capital and output.
- (c) high population density
- Population density does not determine capital productivity.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2018, held on 3 June 2018. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.