Alternative Aggregate Measures of Capacity Utilisation Based on a MACE Production Function

Abstract

The concepts of potential output and capacity utilisation are important both in economic policy discussions and econometric model building. Concerning the former, the evaluation of a given policy stance and the accompanying budget position will to no small degree depend on—among other important factors—the assumed degree of capacity utilisation in the economy scrutinised. In macroeconomic models, the degree of capacity utilisation is likely to enter various important behavioural relationships — in particular price, import and export equations, but possibly also the various factor demand functions (e.g., investment and employment equations). In contrast to this crucial role of the concept of capacity utilisation in applied economics and policy analysis is the lack of a uniform definition of the important variable underlying it: potential output. The purpose of this chapter is not to analyse the reasons for the lack of uniformity with respect to potential output definitions and measurement or to attempt reducing the existing variety in this realm. Rather, this chapter reports on some preliminary results of ongoing research with a particular type of aggregate production function (MACE) and presents some alternative measures of potential output and capacity utilisation which can be derived from the MACE framework.

Opinions expressed in this chapter are those of the authors, and do not necessarily represent those of the OECD.