Alternative Approach of Measuring Capacity Utilization
Ruhul Amin Salim · The Bangladesh Development Studies · 1999
Capacity utilization (CU) one of the important indicators for measuring economic performance of production units. It is important for investment planning and resource allocation. In the literature, there are a number of CU measures. In particular, the 1980s witnessed several econometric measures1. Although these measur are important contribution in the literature, they have two severe limitations. These measures do not take into account individual input response (arising from the application) to output and separate the random noise1 while measuring capacity utilization. Drawing on the arguments of Klein (1960) and Fare et al (1989), the aim of this paper is to suggest a methodology for measuring capacity utilization of any production unit, which overcome these stringent limitations. The framework develops from observed inputs and output to measure capacity utilization; based on the best practice performance of all firms in the sample.