Incremental Capital Output Ratio - ICOR

DEFINITION of 'Incremental Capital Output Ratio - ICOR'

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. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  4. Capital

    1) Financial assets or the financial value of assets, such as ...
  5. Capital Consumption Allowance - ...

    The amount of money a country has to spend each year to maintain ...
  6. Gross National Product - GNP

    Gross national product (GNP) is an economic statistic that includes ...
Related Articles
  1. Markets

    ROA And ROE Give Clear Picture Of Corporate Health

    Both measure performance, but sometimes they tell a very different story. This is why they’re best used together.
  2. Budgeting

    Use ROA To Gauge A Company's Profits

    Do you rely too heavily on ROE? Consider using return on assets for a more complete picture.
  3. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  4. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  5. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  6. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  7. Term

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  8. Markets

    What Saudi-Iranian Tensions Mean for Oil Prices

    The recent break in diplomatic relations between Saudi Arabia and Iran adds complications to the already chaotic environment of Middle East geopolitics. 
  9. Economics

    New Mexico's Economy: The 6 Industries Driving GDP Growth

    Discover the four primary industries that are considered to be the most important drivers in the well-being of the economy of New Mexico.
  10. Entrepreneurship

    Economics of Owning a Bar

    Understand what costs go into starting and running a bar, as well as what earnings can be expected. Learn whether or not it is smart to own a bar.
RELATED FAQS
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  5. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  6. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center