Capacity utilization

Capacity utilization or capacity utilisation is the extent to which an enterprise or a nation actually uses its installed productive capacity. It is the relationship between output that is actually produced with the installed equipment, and the potential output which could be produced with it, if capacity was fully used.

Engineering and economic measures

One of the most used definitions of the "capacity utilization rate" is the ratio of actual output to the potential output. But potential output can be defined in at least two different ways.

Engineering definition

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 existent stock of capital. Thus, a standard definition of capacity utilization is the (weighted) average of the ratios between the actual output of firms to the maximum that could be produced per unit of time, with existing plant and equipment (see Johanson 1968). Obviously, "output" could be measured in physical units or in market values, but normally it is measured in market values.