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The Incremental Capital-Output Ratio (ICOR) is the ratio of investment to growth which is equal to the reciprocal of the marginal product of capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. In most ...
The decision of increasing the production is only beneficial if the MP K is higher than the cost of capital of each additional unit. Otherwise, if the cost of capital is higher, the firm will be losing profit when adding extra units of physical capital. [3] This concept equals the reciprocal of the incremental capital-output ratio.
Where the capital-output ratio will depend upon the relationship of the growth of capital and the growth of productivity. Wages and profits constitute the income , where wages comprise salaries and earnings of manual labor, and profits comprise incomes of entrepreneurs as well as property owners.
Output per worker grows at a roughly constant rate that does not diminish over time. Capital per worker grows over time. The capital/output ratio is roughly constant. (1+2) The rate of return on capital is constant. The share of capital and labor in net income is nearly constant. The wage grows over time. (2+4+5)
Tobin's q [a] (or the q ratio, and Kaldor's v), is the ratio between a physical asset's market value and its replacement value.It was first introduced by Nicholas Kaldor in 1966 in his paper: Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani.
Let Y represent output, which equals income, and let K equal the capital stock. S is total saving, s is the savings rate, and I is investment. δ stands for the rate of depreciation of the capital stock. The Harrod–Domar model makes the following a priori assumptions:
If capital's share in output is 1 ⁄ 3, then labor's share is 2 ⁄ 3 (assuming these are the only two factors of production). This means that the portion of growth in output which is due to changes in factors is .06×(1 ⁄ 3)+.01×(2 ⁄ 3)=.027 or 2.7%. This means that there is still 0.3% of the growth in output that cannot be accounted for.
Vasicek's model was the first one to capture mean reversion, an essential characteristic of the interest rate that sets it apart from other financial prices.Thus, as opposed to stock prices for instance, interest rates cannot rise indefinitely.