Despite being a high saving economy, capital formation may not result in a significant increase in output due to

1. A. weak administrative machinery
2. B. illiteracy
3. C. high population density
4. D. high capital-output ratio

Answer: D

Explanation

Capital formation means increasing the stock of real capital in a country. In other words, capital formation involves making of more capital goods such as machines, tools, factories, transport equipment, materials, electricity, etc., which are all used for future production of goods. For making additions to the stock of Capital, saving and investment are essential. Capital output ratio is the amount of capital needed to produce one unit of output. For example, suppose that investment in an economy, investment is 32% (of GDP), and the economic growth corresponding to this level of investment is 8%. Here, a Rs 32 investment produces an output of Rs 8. Capital output ratio is 32/8 or 4. In other words, to produce one unit of output, 4 unit of capital is needed. Hence, if the capital-output ratio is high, there will not be significant increase in output despite high savings and investment.