Capacity utilization

Thus, a standard definition of capacity utilization is the (weighted) average of the ratios between the actual output of firms and the maximum that could be produced per unit of time, with existing plant and equipment (see Johanson 1968).

For example, higher average costs can arise because of the need to operate extra shifts, to undertake additional plant maintenance, and so on.

In economic statistics, capacity utilization is normally surveyed for goods-producing industries at plant level.

Bondholders view strong capacity utilization (above the trend rate) as a leading indicator of higher inflation.

Much statistical and anecdotal evidence shows that many industries in the developed capitalist economies suffer from chronic excess capacity.

Critics of market capitalism, 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.

The notion of capacity utilization was introduced into modern business cycle theory by Greenwood, Hercowitz, 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 investment spending.

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):

Capacity utilization (black line) in manufacture in the United States, unemployment rate (red line, upside down, scale on the right), employment rate (dotted line)
Capacity utilization in manufacturing in the FRG and in the USA