What is the meaning of capital intensive method of production? Find 5 Answers & Solutions

It allows for variable elasticity of substitution and as pointed out above it does not require the assumption of Hicks-neutrality. Any growth in output that is not explained by some index of input growth is attributed to changes in technology or more broadly productivity. capital intensive technique refers to Thus, TFP growth is a catch-all measure that captures changes in efficiency in addition to pure technical change in the sense of shifts in the production function. The objective of the paper is to analyse the present condition of the industrial sector of the State.

Inflation is a situation of sustained increase in the general price level of goods and services. In such a situation, the working capital required to maintain a normal level of production and sale also increases. Inflation leads to increase in the cost of raw material, rise in wage rate, and rise in all other expenses and thus lead to a need for more working capital. The working capital requirement of a business thus, become higher with higher rate of inflation. Capital intensive method of production refers to a business process or industry in which the proprtion of capital required is more in comparison to labour. The use of capital intensive technology increases per capita profit or income of production unit.

  • It allows for variable elasticity of substitution and as pointed out above it does not require the assumption of Hicks-neutrality.
  • These are respectively called the Divisia quantity Indexes of output, capital and labour.
  • In many industrialised countries labour productivity is calculated as the real value added per man-hour.
  • Here OK amount of capital and OL amount of labour produces the output level denoted by isoquant IQ.

Thus it is clear that higher the level of output is produced by using more capital and less labour. Capital intensive technique is a technique in which comparatively larger amount of capital is used against smaller amount of labour. The slowest decline is observed in manufacture of beverages, tobacco and tobacco products , manufacture of textile products and manufacture of https://1investing.in/ rubber, plastic, petroleum and coal products . It implies the production is taken into a ratio where percentage of capital used is much high than the use of labour. That is, the business or production is mostly or fully dependent on capital. The use of Capital intensive technology increases the initial cost of production because it requires huge investment on imports.

It is the proportion of a company’s capital, financed through owners and borrowed funds. In other words, it represents the mix of long-term funds such as equity shares, preference shares, long-term loans, retained earnings etc., in the total capitalisation of a firm. A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise.

Demerits of Capital intensive technique

TFP may be defined as the ratio of output to a weighted combination of inputs. ‘;Productivity growth is generally understood to represent the exogenous shift of a frontier production function. Therefore, a precise decomposition of growth of output into the contribution of change in inputs and that of total productivity is based on the economic theory of production function. Thus, a weighted average of growth rates of individual components gives the growth rate for the aggregate. These are respectively called the Divisia quantity Indexes of output, capital and labour.

Further, the share of food products fell to 2.8 per cent in 1999 from 13.5 per cent in 1960. While machinery and equipment including electricity contributed 33.9 per cent during 1960, the joint contribution of these two industry groups to value added came down to only 3.8 per cent in 1999. Rubber, plastic and petroleum products showed an even more dismal picture as their contribution came down from 43.2 per cent in 1960 to a mere 1.7 per cent in 1999. On the other hand, the contribution to all-India net value added increased for some industries such as food products; rubber, plastic, petroleum; and basic metal and alloys. Section I discusses the theoretical background and the methodology of the study.

Factor intensity can be discussed with the help of fixed capital per employee and value added per employee. However, there is no unique measurement of capital intensity or labour intensity. Industries can be grouped into labour-intensive or capital-intensive on the basis of average capital-labour ratio (K/L). If the capital-labour ratio of a particular industry is above the average then the industry may be considered as a capital-intensive one. However, this methodology is admittedly arbitrary in nature since there is no specific capital-labour ratio for the industries. The key feature of the GAA is separation of change in production on account of changes in the quantities of factors of production from residual influences, which include technological progress, learning by doing, etc.

Mention two reasons that give rise economic problems

Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning. It helps in forecasting what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. By preparing a blueprint of these three situations the management may decide what must be done different situations.

capital intensive technique refers to

Later on, the concept came to the fore after the works of Tinbergen , Schmookler , Kendrick , Fabricant , Abramovitz and Solow . How does ‘Inflation’ affect the working capital requirements of a company? According to Gerstenberg, Capital structure refers to “the makeup of a firm’s capitalisation”.

Capital Intensive Technique | What is Capital Intensive Technique?

In a labor intensive method more of labor are employed to work and less of machine, whereas in a Capital intensive method more capital and less labor are employed. With the help of Capital intensive technology a country can develop its socio-economic overhead facilities rapidly. In net value added has gone down from 23.2 per cent over the decade of 1960s to 5.4 per cent during the decade of 1990s, while that of employment has gone down from 23.1 per cent to 8.4 per cent over the same period . State any four factors which affects the requirements of working capital of a company.

The use of Capital intensive techniques will create larger employment opportunity in the long run. Capital intensive technique raises skill and efficiency of other factors of production. The need for Divisia index has been noted by Solow and Jorgenson and Griliches .

The study shows that West Bengal has gradually lost its stronghold position once enjoyed during the early 1960s. The State’s shares in net value added, employment and number of factories have gone down drastically over the years. So far as employment is concerned, majority of the industry groups has witnessed negative growth rate. It is interesting to note that only 5 industry groups, which are highly capital intensive, contributed over 85 per cent of total profit in the manufacturing sector. It has also been found that growth of labour productivity in the manufacturing sector as a whole increased from 1.6 per cent in 1970s to 2.6 per cent in the 1980s and further to 5.7 per cent in 1990s.

capital intensive technique refers to

‘;The wide usage of labour productivity is due to the fact that it can be used as proxy for the amount of goods available for consumption per labourer. In many industrialised countries labour productivity is calculated as the real value added per man-hour. However, most of the studies in India are based on data on number of employees or workers for estimation of labour productivity. Following this convention, we have also used the data on number of employees in calculating labour productivity.

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The properties of the Divisia index, which make its application highly desirable, have been discussed in the seminal paper of Christensen and Jorgenson . It has been pointed out that the rates of growth of the Divisia indexes of prices and quantities add up to the rate of growth of the value and that such indexes are symmetric in different directions of time . The translog index is a discrete version of the continuous Divisia index. Translog index numbers are symmetric in data of different time periods and also satisfy the factor reversal test approximately. The translog index of technological change is based on a translog production function, characterised by constant returns to scale.

Which of the following is not an economic goal of the firm

The share of net value added of six important industry groups in West Bengal to all India NVA has declined over the past 30 years. Because of deceleration in growth rate of these industries, the overall industrial scenario of the State was adversely affected. Moreover, the total factor productivity of the manufacturing sector of the State declined during the period, whereas it has gone up at the all-India level. The TFP growth contribution to output is found to be negative for two out of the six industry groups.

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