UPSC Prelims 2018 · Question 50 of 99
UPSC Prelims 2018 question on Capital Output Ratio
- ExamUPSC CSE
- Year2018
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicEconomic Growth
- DifficultyEasy
- TypeDirect
Despite being a high saving economy, capital formation may not result in significant increase in output due to
Show answer
Answer: D. high capital-output ratio
Analysis
A high capital-output ratio is the reason, so the answer is (d).
Capital formation means increasing a country's stock of real capital, the machines, tools, factories, transport equipment and materials used for future production, and it requires saving and investment. The capital-output ratio is the amount of capital needed to produce one unit of output. If investment is 32 percent of GDP and growth at that level of investment is 8 percent, then 32 units of capital produce 8 units of output, giving a ratio of 4. A high ratio therefore means each unit of extra output demands a great deal of capital, so even a high saving economy sees little increase in output.
The other options name real constraints on development, but the stem specifically asks why capital formation itself fails to convert into output, which is a question about the efficiency of capital, not about administration or literacy.
Source
NCERT, Business Studies, page 396.
How to crack it
Read what the stem holds constant. It concedes high saving and capital formation and asks why output does not follow, so the answer must lie in the conversion from capital to output. Only one option speaks to that conversion. Identifying which link in the causal chain the stem is asking about eliminates plausible but off target options quickly.