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What is Capital and its Type? Low and High Capital Output Ratio

Capital has different meanings depending upon the context in which the term is used. It can be Financial capital, human capital, social capital or etc.

  1. Financial Capital refers to financial wealth, particularly those that are used to start or sustain a business
  2. Human Capital can be classified as the measure of skill, Characteristics of education, capacity and labor that affect their productive capacity and earnings Capacity.
  3. Capital can also refer to one of the four factors of production (the other 3 being land, labor, and Organization / Entrepreneurship).
  4. It means all those goods (which we then call capital goods) which are used for further production. Some examples of capital goods are- machines, equipment, factory buildings, etc.

What is Capital Formation?

Capital Formation means the creation of more financial wealth. It also means making of more capital goods such as machines, tools, factories and etc.

How does Capital Formation take place?

Capital Formation take place in three steps:

  1. Step 1: Creation of Savings – By People (households), Corporates as well as Government
  2. Step 2: Mobilization of Savings – Through mechanisms that can transfer the savings from investor to investee.
  3. Step 3: Investment of Savings.

What is Low Capital Output Ratio?

Low Capital Output Ratio implies when least investment is required per unit of output.

What is High Capital Output Ratio?

High Capital Output Ratio implies when the high investment is required per unit of output. Due to High Capital Output Ratio despite being a high saving economy, capital formation may not result in a significant increase in output.

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