Capacity utilisation
Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT
Meaning
Capacity utilisation is the share of a factory's or industry's installed capacity that is actually being used. If utilisation is high, demand is pressing against what firms can produce, and they will soon need fresh investment in new plants and machines. If it is low, the economy has slack: machines stand idle and there is little reason to invest. Because it is available quickly, it gives a real-time signal of the output gap (the gap between actual and potential output) before GDP figures are revised.
Example
Suppose a cement plant can make 100 lakh tonnes a year but produces 80 lakh tonnes. Its capacity utilisation is 80%. In India, the RBI's OBICUS survey (Order Books, Inventories and Capacity Utilisation Survey) tracks this for manufacturing every quarter.
Don't confuse with
- Potential output: this is the whole economy's sustainable "speed limit" without speeding up inflation. Capacity utilisation is a measured ratio of installed capacity in use, mostly for manufacturing, and it is one signal of how close output is to that limit.