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193:, capacity utilization is normally surveyed for goods-producing industries at plant level. The results are presented as an average percentage rate by industry and economy-wide, where 100% denotes full capacity. This rate is also sometimes called the "operating rate". If the operating rate is high, this is called "full capacity", while if the operating rate is low, a situation of "excess capacity" or "surplus capacity" exists. The observed rates are often turned into indices. Capacity utilization is much more difficult to measure for service industries.
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There has been some debate among economists about the validity of statistical measures of capacity utilization, because much depends on the survey questions asked, and on the valuation principles used to measure output. Also, the efficiency of production may change over time, due to new technologies.
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One is the "engineering" or "technical" definition, according to which potential output represents the maximum amount of output that can be produced in the short run with the existing stock of capital. Thus, a standard definition of capacity utilization is the (weighted) average of the ratios between
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However, as output increases and well before the absolute physical limit of production is reached, most firms might well experience an increase in the average cost of production—even if there is no change in the level of plant & equipment used. For example, higher average costs can arise because
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measure is just not very revealing. Prior to the early 1980s, he argues, American business carried a great deal of extra capacity. At that time, running close to 80% would indicate that a plant was approaching capacity restraints. Since that time, however, firms scrapped much of their most
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likes it. Bondholders view strong capacity utilization (above the trend rate) as a leading indicator of higher inflation. Higher inflation—or the expectation of higher inflation—decreases bond prices, often prompting a higher yield to compensate for the higher expected rate of inflation.
258:, therefore, argue the system is not as efficient as it may seem, since at least 1/5 more output could be produced and sold, if buying power was better distributed. However, a level of utilization somewhat below the maximum typically prevails, regardless of economic conditions.
323:(ISM) index asks respondents to measure their current output relative to "normal capacity", and this yields a utilization rate, which is between 4 and 10 percentage points higher than the FRB measure. Again, the time series show more or less the same historical movement.
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for the FRB capacity utilization index, firms are asked about "the maximum level of production that this establishment could reasonably expect to attain under normal and realistic operating conditions, fully utilizing the machinery and equipment in place."
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the actual output of firms and the maximum that could be produced per unit of time, with existing plant and equipment (see
Johanson 1968). Output could be measured in physical units or in market values, but normally it is measured in market values.
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The average economy-wide capacity utilization rate in the US since 1967 was about 81.6%, according to the
Federal Reserve measure. The figure for Europe is not much different, for Japan being only slightly higher.
153:(see Berndt & Morrison 1981). Typically, this measure will yield a rate around 10 percentage points higher than the "engineering" measure, but time series show the same movement over time.
274:, and Huffman (1988). They illustrated how capacity utilization is important for getting business cycle correlations in economic models to match the data when there are shocks to
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The average utilization rate of installed productive capacity in industry, in some major areas of the world, was estimated in 2003/2004 to be as follows (rounded figures):
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E. Berndt & J. Morrison, "Capacity utilization measures: Underlying
Economic Theory and an Alternative Approach", American Economic Review, 71, 1981, pp. 48–52
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It is often believed that when the utilization rate rises above somewhere between 82% and 85%, price inflation will increase. Excess capacity means that insufficient
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be produced with it, if capacity was fully used. The
Formula is the actual output per period all over full capacity per period expressed as a percentage.
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An alternative approach, sometimes called the "economic" utilization rate, is, therefore, to measure the ratio of actual output to the level of output
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weakens, capacity utilization will slacken. Economists and bankers often watch capacity utilization indicators for signs of inflation pressures.
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149:. In this case, surveyed firms are asked by how much it would be practicable for them to raise production from existing plant and equipment,
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I. Johanson, Production functions and the concept of capacity", Collection
Economie et Mathematique et Econometrie, 2, 1968, pp. 46–72
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are being used. Much statistical and anecdotal evidence shows that many industries in the developed capitalist economies suffer from
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inefficient capacity. As a result, a modern 77% capacity utilization now would be equivalent to a historical level of 70%.
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All else constant, the lower capacity utilization falls (relative to the trend capacity utilization rate), the better the
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One of the most used definitions of the "capacity utilization rate" is the ratio of actual output to the
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Economic
Reforms and Industrial Performance: An analysis of Capacity Utilization in Indian Manufacturing
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The
Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities
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The
International Politics of Surplus Capacity: Competition for Market Shares in the World Recession
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percentage" (%OG) can be measured as the gap between actual output (AO) and potential output (PO)
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Thomas G. Rawski, "The
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Implicitly, the capacity utilization rate is also an indicator of how efficiently the
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Measuring
Capacity Utilization in OECD Countries: A Cointegration Method
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Capacity utilization (black line) in manufacture in the United States,
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produced with the installed equipment, and the potential output which
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100:(maximum output of a firm or nation). It is the relationship between
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435:"The Fed – Industrial Production and Capacity Utilization – G.17"
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The notion of capacity utilization was introduced into modern
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is the extent to which a firm or nation employs its installed
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Annys Shin, "Economy Strains Under Weight of Unsold Items",
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If market demand grows, capacity utilization will rise. If
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United States 79.5% (April 2008 — Federal Reserve measure)
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beyond which the average cost of production begins to rise
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Keynes, Investment Theory and the Economic Slowdown
330:: Industrial Production and Capacity Utilization.
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588:Measuring capacity utilization in OECD countries
328:Board of Governors of the Federal Reserve System
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169:(red line, upside down, scale on the right),
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357:European Union 82% (Bank of Spain estimate)
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75:Learn how and when to remove this message
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38:This article includes a list of general
583:FAO discussion of concepts and measures
568:US survey of plant capacity utilisation
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235:exists to warrant expansion of output.
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360:Australia 80% (National Bank estimate)
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16:Measure of use of productive capacity
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697:Agent-based computational economics
573:Capacity utilisation of US industry
369:China perhaps 60% (various sources)
254:excess capacity. Critics of market
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503:(London: Allen & Unwin, 1981).
44:it lacks sufficient corresponding
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116:Engineering and economic measures
1155:neoclassical–Keynesian synthesis
286:As a derivative indicator, the "
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459:. Turkstat.gov.tr. 9 April 2009
457:"Turkish Statistical Institute"
372:Turkey 79.8% (September 2008 —
366:India 70% (Hindu business line)
363:Brazil 60–80% (various sources)
321:Institute for Supply Management
307:FRB and ISM utilization indexes
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379:Canada 87% (Statistics Canada)
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282:Output gap percentage formula
354:Japan 83–86% (Bank of Japan)
262:Modern business cycle theory
204:has argued in his 1989 book
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151:without raising unit costs
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557:, 17 February 2009, A01.
531:American Economic Review
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346:Average utilization rate
294:by potential output and
869:Industrial organization
692:Computational economics
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59:more precise citations.
1074:Modern monetary theory
739:Experimental economics
709:Pluralism in economics
682:Mathematical economics
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128:Engineering definition
519:12 April 2008 at the
313:Federal Reserve Board
270:theory by Greenwood,
248:factors of production
220:Economic significance
213:Federal Reserve Board
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1723:Production economics
948:Social choice theory
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687:Complexity economics
94:capacity utilisation
90:Capacity utilization
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732:Economic statistics
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191:economic statistics
141:Economic definition
98:productive capacity
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1693:Publications
1649:Publications
1616:
1212:Neoclassical
1202:Mercantilism
1111:Evolutionary
973:Sociological
946: /
844:Geographical
824:Evolutionary
799:Digitization
764:Agricultural
727:Econometrics
655:Price theory
554:
545:
542:Anwar Shaikh
530:
510:
507:James Crotty
500:
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463:27 September
461:. Retrieved
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439:. Retrieved
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417:. Retrieved
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1487:von Neumann
1256:Supply-side
1241:Physiocracy
1185:Marginalism
874:Information
814:Engineering
794:Development
789:Demographic
660:Game theory
637:Theoretical
240:bond market
157:Measurement
57:introducing
1712:Categories
1644:Economists
1517:Schumacher
1422:Schumpeter
1392:von Wieser
1312:von ThĂĽnen
1272:Economists
1171:Circuitism
1136:Humanistic
1131:Historical
1106:Ecological
1096:Democratic
1069:Chartalism
1059:Behavioral
1022:Mainstream
983:Statistics
978:Solidarity
899:Managerial
864:Humanistic
859:Historical
804:Ecological
769:Behavioral
476:References
296:multiplied
288:output gap
256:capitalism
40:references
21:Output gap
19:See also:
1562:Greenspan
1527:Samuelson
1507:Galbraith
1477:Tinbergen
1417:von Mises
1412:Heckscher
1372:Edgeworth
1251:Stockholm
1246:Socialist
1146:Keynesian
1126:Happiness
1086:Classical
1047:Mutualism
1042:Anarchist
1027:Heterodox
924:Personnel
884:Knowledge
849:Happiness
839:Financial
809:Education
784:Democracy
719:Empirical
629:Economics
511:Challenge
419:9 January
298:by 100%:
272:Hercowitz
65:June 2013
1673:Category
1653:journals
1639:Glossary
1592:Stiglitz
1557:Rothbard
1537:Buchanan
1522:Friedman
1512:Koopmans
1502:Leontief
1482:Robinson
1367:Marshall
1217:Lausanne
1121:Georgism
1116:Feminist
1064:Buddhist
1054:Austrian
953:Regional
929:Planning
904:Monetary
834:Feminist
779:Cultural
774:Business
517:Archived
441:14 April
1688:Outline
1659:Schools
1651: (
1612:Piketty
1607:Krugman
1472:Kuznets
1462:Kalecki
1437:Polanyi
1327:Cournot
1322:Bastiat
1307:Ricardo
1297:Malthus
1287:Quesnay
1190:Marxian
1081:Chicago
1011:history
1006:Schools
993:Welfare
963:Service
754:Applied
533:, 1988.
292:divided
252:chronic
53:improve
1597:Thaler
1577:Ostrom
1572:Becker
1567:Sowell
1547:Baumol
1452:Myrdal
1447:Sraffa
1442:Frisch
1432:Knight
1427:Keynes
1402:Fisher
1397:Veblen
1382:Pareto
1362:Menger
1357:George
1352:Jevons
1347:Walras
1337:Gossen
1261:Thermo
939:Public
934:Policy
889:Labour
854:Health
410:
233:demand
226:demand
207:Keynes
102:output
42:, but
1683:Lists
1678:Index
1629:Lists
1602:Hoppe
1587:Lucas
1552:Solow
1542:Arrow
1532:Simon
1497:Lange
1492:Hicks
1467:Röpke
1457:Hayek
1407:Pigou
1377:Clark
1292:Smith
1207:Mixed
1166:Post-
988:Urban
968:Socio
958:Rural
384:Notes
110:could
104:that
1618:more
1342:Marx
1332:Mill
1317:List
1195:Neo-
1151:Neo-
465:2013
443:2018
421:2023
408:ISBN
334:Data
326:See
1582:Sen
1302:Say
1161:New
894:Law
189:In
183:FRG
92:or
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490:,
392:^
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106:is
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