In spite of being a high saving economy, capital formation may not result in a significant increase in output due to –
Explanation
Capital Formation: This refers to the addition to the existing stock of physical and human capital in an economy.
High Savings: High savings provide the necessary funds for investment. However, savings alone do not guarantee growth; the efficiency with which those savings are converted into output is crucial.
Capital-Output Ratio (COR): This ratio indicates the amount of capital required to produce one unit of output. - A low ratio means capital is efficient. - A high ratio means capital is inefficient (more capital is needed for the same amount of output).
Why (D) is correct: Even if an economy saves and invests heavily (capital formation), if the Capital-Output Ratio is high, the resulting increase in output (GDP) will be low. This often happens due to technological backwardness, poor infrastructure, or inefficient management of resources.