What is the 'Incremental Capital Output Ratio - ICOR'

The incremental capital output ratio (ICOR) is a metric that assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production. Overall, a higher ICOR value is not preferred because it indicates that the entity's production is inefficient. The measure is used predominantly in determining a country's level of production efficiency.

ICOR is calculated as:

Incremental Capital Output Ratio (ICOR)

BREAKING DOWN 'Incremental Capital Output Ratio - ICOR'

For example, suppose that Country X has an ICOR of 10. This implies that $10 worth of capital investment is necessary to generate $1 of extra production. Furthermore, if country X's ICOR was 12 last year, this implies that Country X has become more efficient in its use of capital.

Some critics of ICOR have suggested that its uses are restricted as there is a limit to how efficient countries can become as their processes become increasingly advanced. For example, a developing country can theoretically increase its GDP by a greater margin with a set amount of resources than its developed counterpart can. This is because the developed country is already operating with the highest level of technology and infrastructure. Any further improvements would have to come from more costly research and development, whereas the developing country can implement existing technology to improve its situation.

RELATED TERMS
  1. Developed Economy

    While there is no one, set definition of a developed economy ...
  2. Capital Formation

    A term used to describe net capital accumulation during an accounting ...
  3. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  4. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  5. Capital Blockade

    A form of economic sanction in which a country or a group of ...
  6. World Fund

    A mutual fund that invests in securities from several different ...
Related Articles
  1. Insights

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization provides new opportunities for diversification and profit.
  3. Managing Wealth

    Evaluating Country Risk For International Investing

    Investing overseas begins with determining the risk of the country's investment climate.
  4. Investing

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  5. Insights

    3 Ways You Can Evaluate Country Risk

    Diversifying your portfolio includes looking beyond your borders. Here are a few ways to analyze risk when investing abroad.
  6. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  7. Investing

    Why Country Funds Are So Risky

    High returns come at a price, but country funds may still be a good bet.
  8. Investing

    What does Current Account mean?

    The current account reflects the difference between a country’s savings and investments.
  9. Trading

    6 Factors That Influence Exchange Rates

    An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  10. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
RELATED FAQS
  1. How does a capital account illustrate the strength of investment markets for a country?

    Understand what a country's capital account is and how the capital account level can be used to gauge the strength of investment ... Read Answer >>
  2. What economic indicators are most used when forecasting an exchange rate?

    Discover what economic indicators are most widely used to forecast a country’s exchange rate and how various factors influence ... Read Answer >>
  3. Is Brazil a developed country?

    Understand why Brazil's low per capita gross domestic product; high birth and death rates; and subpar living conditions classify ... Read Answer >>
  4. What does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ... Read Answer >>
  5. Is South Korea a developed country?

    Understand the criteria for determining if a country is developed, and learn why South Korea ranks as a developed country ... Read Answer >>
  6. Which countries are most productive in terms of GDP?

    Countries around the world constantly compete with one another to be the most innovative and productive. Read to see which ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center