If the capital output ratio is 5: 1, then what will be the capital coefficient ?

Question

Accepted Answer

The correct option is 1:

In economics, the concept of the Capital-Output Ratio (COR) and the Capital Coefficient are fundamentally the same metric. This ratio measures the amount of capital (K) required to produce one unit of output (Y). It is mathematically expressed as K/Y. The term 'capital coefficient' is merely an alternative name for the capital-output ratio, especially when used in growth models like the Harrod-Domar model, where it is a crucial determinant of the required rate of investment for economic growth. Since the question states that the Capital-Output Ratio is 5:1, this means that 5 units of capital are required to produce 1 unit of output. Therefore, the value of the capital coefficient (K/Y) is 5. This figure is vital for planning as it indicates the efficiency of capital utilization in an economy; a lower ratio suggests higher capital efficiency.

The incorrect option is 2:
The value 1/5, or 0.2, would represent the Output-Capital Ratio (Y/K), which measures output generated per unit of capital, and is the reciprocal of the capital coefficient. This ratio is sometimes referred to as the productivity of capital.

The incorrect option is 3:
The value 25 is mathematically incorrect. It is not derived from the ratio 5:1 and has no standard economic meaning in relation to the capital-output ratio. Multiplying the two terms (5 \* 5) or squaring the capital ratio (5^2) are arbitrary calculations unrelated to the required definition.

The incorrect option is 4:
The value 0.5 represents a capital-output ratio of 1:2 (0.5/1), which means that 0.5 units of capital are required to produce 1 unit of output. This directly contradicts the given information that the ratio is 5:1.