Explanation:

Correct Option: (b) Explanation:  Statement 3 is incorrect: ICOR = Annual Investment/Annual Increase in GDP. Hence it is a ratio of 2 fl ow variables. Supplementary notes: Incremental Capital Output Ratio (ICOR)  The incremental capital output ratio (ICOR) explains the relationship between the level of investment made in the economy and the consequent increase in GDP.  ICOR is a metric that assesses the marginal amount of investment capital necessary for a country or other entity to generate the next unit of production.  A lower ICOR is preferred as it indicates a country’s production is more effi cient.  Overall, a higher ICOR value is not preferred because it indicates that the entity’s production is ineffi cient. The measure is used predominantly in determining a country’s level of production effi ciency.  Some critics of ICOR have suggested that its uses are restricted because there is a limit to how effi cient countries can become based on available technology. For example, a developing country can theoretically increase its GDP by a greater margin with a set amount of resources than its developed counterpart can.  This is because the developed country is already operating with the highest level of technology and infrastructure whereas a developing country has room to improve. Any further improvements in a developed country would have to come from more costly research and development (R&D), whereas the developing country can implement existing technology to better its situation.  ICOR = Annual Investment/Annual Increase in GDP. Hence it is a ratio of 2 fl ow variables.