LIMITATIONS OF CAPITAL-OUTPUT RATIO IN AN UNDERDEVELOPED

COUNTRY

NAME: OLADIGBO FERANMI

MATRIC NUMBER: RUN/ECO/15/5982

ECO 405: ECONOMIC PLANNING

LECTURER: DR ADELEKE

DATE: MONDAY, 5TH AUGUST, 2018.

The concept of capital-output ratio is limited by certain factors.

1. Its precise calculation is quite difficult.

2. The quantities relationship between capital investment and output, as suggested by the
capital-output ratio may prove to be misleading.
3. It would be dangerous to base the estimates of capital requirements of the economy or
specific industries on such ratios.
4. Capital stock and output cannot be assumed to be exact, its difficult to get exact
measurements for them.
5. It’s difficult to make a clear distinction between capital and non-capital goods.
6. Returns to social overheads cannot be accurately calculated.
7. Capital- output ratio is affected by numerous variables e.g. organisational improvements,
better utilisation of equipment, labour efficiency, technological improvements and these
factors cannot be measured quantitatively.
8. Thus, capital-output ratio has limited practical significance since it cannot indicate the
actual contribution of capital alone in a given investment period.
9. It is necessary to be extra cautious in consideration of using a particular capital-output
ratio to adopt an actual investment policy.
REFERENCE

1. www.yourarticlelibrary.com/economics/determining-factors-and liitations-of-capital-
output-ratio/38252