Question 50

A high saving economy implies that a significant portion of national income is being saved and potentially invested, leading to capital formation. However, if this capital formation does not result in a significant increase in output, it suggests an inefficiency in the utilization of capital. This inefficiency is directly captured by a high capital-output ratio. A high capital-output ratio means that a large amount of capital investment is required to produce a relatively small increase in output. In other words, the productivity of capital is low. If this ratio is high, even with substantial capital formation (due to high savings), the resulting increase in output will be modest.

While weak administrative machinery, illiteracy, and high population density are indeed developmental challenges that can hinder overall productivity, the most direct economic reason for capital formation failing to generate proportional output increase is the inefficiency of capital, as reflected in a high capital-output ratio.