Capacity Utilization Rate - Explained
What is Capacity Utilization Rate?
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What is Capacity Utilization Rate?
The capacity utilization rate is a metric that measures the actual economic output that a firm or an economy realizes in relation to how factors of economic output are put to use. The capacity utilization rate reflects the proportion at which the levels of economic output are used. In another language, a capacity utilization rate examines how well a nation or a firm utilizes its productive capacity. Hence, if there is a slack in the utilization of output capacity at a specific time, it is reflected through the capacity utilization rate. The formula for calculating capacity utilization rate is: (Actual Output / Potential Output ) x 100
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What is the Capacity Utilization Ratio?
The capacity utilization rate measures the rate at which a country or firm utilized its levels of economic output, this is reflected by the proportion of economic output that a country actualizes over a period of time. When the capacity utilization rate is below 100%, it means the firm or country has not exhausted all its installed productive capacity. Firms or economies in this category can harness the unused part of their production capacity to achieve a greater economic output. The capacity utilization rate is an essential metric that helps to relate economic output with the productive capacity of a nation.
Corporate Capacity Utilization Rates
Oftentimes, the capacity utilization rate is applied to goods that can be quantified, mostly physical goods that can be numbered. The efficiency of a company's operating system is reflected through the capacity utilization rate. This ratio is helpful in determining the installed productive capacity of a firm or country and how effectively they have been used to realize economic output. Also, increase in unit costs can be identified through the capacity utilization rate.
Historical Capacity Utilization Rates
The capacity utilization rate has been put to use in many occasions. Data and results of capacity utilization in the United States are published by the Federal Reserve. The Federal Reserve also gathers historical data which helps in relating past events pertaining to economic output to recent happenings. Data on capacity utilization published by the Federal Reserve dated as far back as 1960. This was when the highest capacity utilization rate was recorded, at that time, the economic output achieved was up to 90%. The greatest decline in the utilization rate was recorded in 1882 and 2009 respectively, this was when the Federal Reserve recorded a 70.9% and 66.7%, accordingly.
Effects of Low Capacity Utilization
According to the data gathered as published by the Federal Reserve, it is not only possible to achieve a high capacity utilization rate, a low capacity utilization rate can be realized. Capacity utilization is an essential economic indicator that draws the attention of policymakers and other stakeholders. When the utilization rate of a nation is low, it will have some potential effects on the nation and this is a major concern for policymakers. Common examples of countries that were affected by low capacity utilization are France and Spain in 2015 and 2016. There was a high degree of slack noticed in these European economies as a result of low capacity utilization.
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- Time Preference Theory of Interest
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
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- Comparative Advantage
- Criticisms of the Economic Approach
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- Normative Economics
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