Capacity Utilization - Measurement

Measurement

In economic statistics, 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 "undercapacity", while if the operating rate is low, a situation of "excess capacity" or "surplus capacity" exists. The observed rates are often turned into indices.

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.

For example, Michael Perelman has argued in his 1989 book Keynes, Investment Theory and the Economic Slowdown: The Role of Replacement Investment and q-Ratios that the US Federal Reserve Board measure is just not very revealing. Prior to the early 1980s, he argues, American business carried a great deal of extra capacity. Running close to 80% indicated at the time approaching capacity restraints. Since that time, firms have scrapped much of their most inefficient capacity. As a result, a modern 77% capacity utilization now would be equivalent to a historical level of 70%.