Capital Output Ratio

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Description of Capital Output Ratio. Explanation.

 

Definition Capital Output Ratio. Description.


Capital Output Ratio is the ratio that shows the amount of units of capital that are needed to produce a certain level of output.


A high capital output ratio means a large amount of capital is needed for production as economic growth increases, and therefore exaggerates the trade cycle.


The Accelerator Theory suggests that the level of net investment will be determined by the rate of change of national income. If national income is growing at an increasing rate then net investment will also grow, but when the rate of growth slows net investment will fall. There will then be an interaction between the multiplier and the accelerator that may cause larger fluctuations in the trade cycle.


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