Question
UPSC Prelims 2018 Question:
Despite being a high saving economy, capital formation may not result in significant increase in output due to
Answer (Detailed Solution Below)
Option 4: high capital-output ratio
Detailed Solution
Explanation:
- Capital formation means increasing the stock of real capital in a country. In other words, capital formation involves the making of more capital goods such as machines, tools, factories, transport equipment, materials, electricity, etc., which are all used for the future production of goods.
- For making additions to the stock of Capital, saving and investment are essential. The capital-output ratio is the amount of capital needed to produce one unit of output.
- Hence, if the capital-output ratio is high, there will not be a significant increase in output despite high savings and investment.
Therefore, option (4) is the answer.
Subject: Economics | Basic Economic Concepts
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