Incremental Capital Output Ratio - ICOR

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. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  3. Capital Outflow

    The movement of assets out of a country. Capital outflow is considered ...
  4. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  5. Country Risk

    A collection of risks associated with investing in a foreign ...
  6. World Fund

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

    What Is International Trade?

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

    Could Third World Debt Relief Pay Off?

    Debt is as much a political tool as an economic one. Discover if wholesale debt forgiveness is the answer for developing countries.
  3. Economics

    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.
  4. Forex

    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.
  5. Investing Basics

    Why Country Funds Are So Risky

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

    What does Current Account mean?

    The current account reflects the difference between a country’s savings and investments.
  7. Forex Fundamentals

    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.
  8. Economics

    Macroeconomics: International Trade

    By Stephen Simpson International trade is the exchange of goods, services and capital across national borders. It is a multi-trillion dollar activity, central to the GDP of many countries, and ...
  9. Economics

    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.
  10. Economics

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  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. 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 >>
  5. Is Argentina a developed country?

    Learn why Argentina, as of 2015, is not classified as a developed country despite having a qualifying gross domestic product ... 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. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center