CA Foundation · Business Economics · Indian Economy
A Plan sets a target GDP growth rate of 6% per annum. If the economy's incremental capital-output ratio (ICOR) is 4, what must be the required investment rate (investment as a percentage of GDP) to achieve the target?
The required investment rate is 24% of GDP. Since ICOR equals the investment rate divided by the growth rate, the investment rate equals ICOR multiplied by growth, which is 4 times 6 percent. Dividing growth by ICOR, giving 1.5%, would be incorrect.
- A24%Correct
- B1.5%
- C10%
- D20%
Explanation
ICOR = Investment rate / Growth rate, so Investment rate = ICOR x growth rate = 4 x 6% = 24%. Check: 24% / 4 = 6%. The 1.5% option comes from dividing 6 by 4, which inverts the relationship.
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