Question 62 from UPSC CSE 2018 - Economy

Question

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

IASCODEX · Accepted Answer

Correct Option: D. high capital-output ratio

Strategy: Focus on the keyword 'capital formation' linked with 'output' — this directs attention to economic concepts rather than administrative or demographic issues. The key analytical phrase is 'capital-output ratio': if this is high, more capital is needed for the same unit of output, so output growth stays limited regardless of high savings. Other options (administrative machinery, illiteracy, population density) do not have a direct technical link to the relationship between savings, investment, and output.

Key Info: Capital formation refers to the net addition to physical assets such as machinery, infrastructure, and equipment, which boost productive capacity. In classical and Keynesian growth models, capital formation is a driving engine for economic growth, provided that investments translate into effective output. The capital-output ratio (COR) measures the efficiency with which capital generates output; a high COR means that a large volume of capital is necessary to produce a unit increase in output, signalling inefficiency. Factors that could cause a high COR include obsolete technology, infrastructural bottlenecks, and misallocation of capital. Consequently, even in economies with abundant savings and capital formation, if the COR is high, incremental output remains limited. The Harrod-Domar model in development economics uses the COR to relate investment rates to economic growth. Administrative machinery quality, population density, or illiteracy may affect other developmental aspects, but only the capital-output ratio constitutes a direct quantitative constraint between savings/capital formation and output growth.

IASCODEX · Answer

Option A: weak administrative machinery

IASCODEX · Answer

Option B: illiteracy

IASCODEX · Answer

Option C: high population density