Page 60 - DECO303_INDIAN_ECONOMY_ENGLISH

Unit 4: Capital Formation

Notes

Notes Good quality infrastructure is most critical physical requirement for attaining
faster economic growth in a competitive world and also for ensuring investment in
backwards regions.

4.5 Savings Rate, Growth Rate and ICOR

In this section, we will discuss about the savings rate, growth rate and ICOR. An estimate from
the U.S. Commerce Department’s Bureau of Economic Analysis (BEA) of the quantity of revenue
left over after deducting consumption costs and expenditures. The National Savings Rate, though
it is mentioned to as a “savings rate,” does not really measure the sum of money Americans are
saving or investing for the long-term. National savings comprise savings left over from personal,
business and government.
The extent of growth that an exact variable has increased within a specific period and context.
For investors, this characteristically signifies the compounded annualized rate of growth of a
company’s revenues, earnings, dividends and even macro ideas - such as the economy as a
whole. Probable forward-looking or irregular growth rates are two common kinds of growth
rates used for investigation.

Various types of industries have dissimilar standards for rates of growth.

Example: Companies that are on the cutting edge of technology would be more probable
to have higher yearly rates of growth associated to a mature industry, like retail sales.
You must understand that the use of past growth rates is one of the modest approach of valuing
future growth. Conversely, factually high growth rates don’t always unkind a great rate of
development looking into the future, because manufacturing and economic conditions change
constantly.

Example: The auto industry has higher rates of revenue growth during good economic
times. However, in times of recession, consumers would be more inclined to be frugal and not
spend disposable income on a new car.

A metric that measures the marginal aggregate of investment capital needed for an object to
produce the next unit of production. Generally, a higher ICOR value is not desired because it
specifies that the object’s production is incompetent. The measure is used mainly in defining a
country’s level of production proficiency.

ICOR is calculated as:
Annual Investment
ICOR =
Annual Increase in GDP

Example: Presume that Country A has an ICOR of 10. This indicates that $10 value of
capital investment is required to produce $1 of additional production.
Moreover, if country A’s ICOR was 12 last year, this infers that Country A has become more
well-organised in its use of capital.

Some opponents of ICOR have recommended that its uses are constrained as there is a limit to
how well-organised countries can develop as their procedures become progressively progressive.

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