Capacity Utilisation in Irish Manufacturing

Abstract

Capacity Utilisation (CU) measures play an important role in practical economic analysis. Variation in the extent to which existing capacity is being utilised provides an indication of how the supply side of a particular industry, sector or economy is evolving relative to its demand side. Such measures have been used to explain changes in investment flows and the general economic environment. However, the primary significance of CU measures stems from their usefulness in uncovering upward pressure on the price level (i.e. inflation). This paper reviews some of the more common methods of calculating measures of capacity utilisation. All methods are shown to have their own specific advantages and disadvantages. The available monthly survey measures are currently the most accessible and perhaps the most useful from a policy viewpoint given the high frequency with which they become available. However, there is a large degree of uncertainty about what these surveyed measures actually mean. The paper has also applied the recently popularised cost function approach to measuring CU. In recognition of the dichotomy which characterises Irish industry, the model was also fitted to two individual sub-sector classifications: Hi-technology and Traditional manufacturing. The results suggest that a substantial degree of excess capacity existed in Irish manufacturing between 1970 and 1990. The constructed CU measure is also examined as a possible indicator of inflationary pressure. No significant relationship between CU and inflation was found in either the Total or Hi-Technology sectors. However, the CU ratio for the Traditional sector was found to be significantly positively related to Irish inflation.