What Are The Limitations Of Capital Output Ratio?

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Muhammad Abdullah786 Profile
The determination of the capital output ratio at micro and macro levels is not as easy affair. Even if COR is worked out, its accuracy cannot be guaranteed due to the poor state of statistics in UDCs. The estimation work also suffers due to inadequate or incomplete data, cooked up figures, biased information and deliberate manipulation, distortions or tempering of facts. Under the circumstances, the reliability and dependability of the COR will always remain doubtful.

The estimation of the COR under abnormal circumstances such as recession becomes superfluous. The reason is that the size of the capital stock remains relatively unchanged while production is highly depressed, the resultant COR being unreasonable higher and not very helpful in accurately assessing the investment requirements. The whole exercise of calculation of the COR, under the circumstances, will be avoid of any sense.

The COR, as pointed out earlier, is a function of growth. The COR is likely to change from one year to the other as development proceeds or growth momentum picks up. Thus the projection made in a plan on the basis of prevailing COR may not be highly satisfactory and the actual COR may not correspond with that used for making projections at the outset of a plan.

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