Capital formation in high saving economy

20.Despite being a high saving economy, capital formation may not result in significant increase in output due to
a) Weak administrative machinery
b) Illiteracy
c) High population density
d) High capital output ratio

Ans: d) High capital output ratio
Explanation:-

• If a country has poor technology and low efficiency, even high savings, it will lead to low economic growth.
• Capital output ratio (COR) is the amount of capital needed to produce one unit of output. A higher COR value  is  not  preferred  because  it  indicates  that  the  entity's  production  is  inefficient.  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%.  Capital  output  ratio  is  32/8  or  4.  In  other  words,  to produce one unit of output, 4 unit of capital is needed.
• Thus,  in  case  of  high  capital-output  ratio,  despite  high  savings,  capital  formation  may  not  result  in significant increase in output.
• Therefore, Option D is the most appropriate answer.