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Noting the variety of methods by which the concept of economic capacity is measured and the different ways that the concept is defined, Richard E. Gift seeks here to develop a conceptual framework within which a meaningful interpretation of these many definitions and measures of productive capacity can be made. Gift's method is to show the common structure that is shared by all capacity concepts and arguments. This structure consists of a list of variables that must always be considered when assessing the economic capacity of productive equipment. He then shows that the problems which arise in comparing capacities for different dates can be expressed in the form of a few simple generalizations. His third step is to illustrate specific problems. Finally, he sets out to develop a test for the logical completeness of any argument about capacity.
The Federal Reserve Board's (FRB) series on capacity utilization constitutes an important indicator of resource utilization. However, it is well known that economic capacity is difficult both to define and to measure. This paper considers alternative measures of capacity in which time-series methods are used to extract a permanent component from data on industrial production (IP). For a given industry, all that is needed to estimate the permanent component is the IP index for that industry. The associated utilization measure is calculated as IP divided by its permanent component. These measures have the advantage of being consistently measured over time; also, they are easily reproducible. Measures of resource utilization are primarily useful as indicators of inflation. Accordingly, the FRB series are evaluated relative to the alternatives in terms of their ability to explain both current and future producer price inflation. Data are analyzed for manufacturing as a whole and for a number of disaggregated industries. The results show that the alternative series generally perform as well as or better than the FRB series in terms of their ability to explain or predict inflation.