Despite being a high-saving economy, capital formation may not result in a significant increase in output due to
- Weak administrative machinery
- Illiteracy
- High population density
- High capital-output ratio
Explanation
Option (d) is correct
- Even in a high-saving economy, capital formation (the process of building up the stock of physical capital, such as machinery, tools, factories, and infrastructure) may not lead to a significant increase in output if the capital-output ratio is high. The capital-output ratio (COR) refers to the amount of capital required to produce one unit of output. A high capital-output ratio means that a significant amount of capital is needed to produce each unit of output. This can be due to economic inefficiencies, outdated technology, poor management, or underutilised resources. As a result, even with high levels of investment, the actual increase in production may be limited.
- Example: Suppose a country invests in building several new factories (capital formation). However, if the factories are run inefficiently, use outdated machinery, or are poorly maintained, they will require a large amount of capital to produce only a small increase in output. This reflects a high capital-output ratio.
- Other Options: Weak administrative machinery, illiteracy, and high population density affect economic factors but do not directly explain why capital formation doesn’t increase output efficiently as a high capital-output ratio does.
