Showing papers on "Capacity utilization published in 1995"

Aggregate uncertainty, capacity utilization and manufacturing investment

Abstract: Theory suggests that the level of uncertainty affects the investment decision for firms, although the sigh of the effect is ambiguous. A GARCH-M estimator is used to model the conditional variance of GDP as a proxy for uncertainty. This measure is then employed in a simple model of the investment decision. The results are that the level of aggregate uncertainty has a significant negative effect on manufacturing investment. In particular periods there were very large effects - on average, uncertainty reduces investment by about 5%, but in 1974 the effect peacked at 48%.

The Peace Dividend : Military Spending Cuts and Economic Growth

Abstract: Although conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, empirical studies have produced ambiguous results. This paper extends a standard growth model and estimates it using techniques that exploit both cross-section and time-series dimensions of available data to obtain consistent estimates of the growth-retarding effects of military spending via its adverse impact on capital formation and resource allocation. Model simulations suggest that a substantial long-run “Peace Dividend”--in the form of higher capacity output--may result from: (i) markedly lower military expenditure levels achieved in most regions during the late 1980s; and (ii) further military spending cuts that would be possible in the future if a global peace could be secured.

Rapid Economic Growth with Increasing Returns to Scale and Little or no Productivity Growth

Abstract: Total factor productivities for 28 Korean manufacturing sectors were estimated jointly with markups, scale economies, and the capacity utilization rate using the short-run generalized Leontief cost function. Concavity conditions necessary for the cost function to be well-behaved and consistent with a firm's optimizing behavior were imposed on the estimation by way of Bayesian inference. The study finds: (1) the superiority of the short-run equilibrium model over the long-run model and of the short-run generalized Leontief cost function over the translog cost function; (2) market imperfection; (3) the existence of scale economies; and (4) biases in the traditional TFP measures. The study also suggests that a rapid growth of output is possible with negative TFP growth. Copyright 1995 by MIT Press.

Internal finance and monopoly power in capitalist economies: a reformulation of steindl's growth model

Abstract: This paper develops a formalization of the model of growth developed by Steindl in chapter XIII of his Maturity and Stagnation in American Capitalism in order to examine the interaction of real and financial factors in capitalist economies. It will look at the short-and long-run behaviour of the economy in which firms have monopoly power, hold excess capacity, and finance a part of their investment spending out of internal savings. The analysis shows the possibility of instability in the economy due to financial and goods market considerations and their interaction, and considers the implications of financial factors for the long-run effects of the rise of oligopoly.

How Useful Are Leading Indicators of Inflation

Abstract: Many economists expect inflation to rise in 1995. These expectations are based on various approaches to forecasting inflation. One approach is based on the standard economic theory that inflation rises when slack is eliminated from the economy and production exceeds capacity constraints. According to this view, measures of economic slack such as unemployment and capacity utilization provide useful information about the inflation outlook. But the relationship between slack and inflation is complicated and subject to variable lags. Uncomfortable with this complex relationship, some analysts rely on alternative approaches to forecasting inflation. One approach is based on "leading indicators" of inflation. The leading indicators typically incorporate information on selected prices to augment or replace information on economic slack. The prices selected are usually key commodity prices that fluctuate more or less continuously in response to changing economic conditions. Prominent leading indicators of inflation include the price of gold, broader indexes of commodity prices, and composite indicators that combine several economic series believed to predict the inflation rate. How useful are these leading indicators for forecasting inflation? This article examines five widely watched leading indicators. The first section evaluates the strengths and weaknesses of these indicators based on economic theory. The second section evaluates the leading indicators empirically, looking at how the indicators have performed by themselves and whether the indicators add useful information to a standard model relating inflation to economic slack. It is concluded that, of the five leading indicators, the composite indicators have given the most useful early warning signals of inflation turning points, but none of the indicators has recently been successful in predicting inflation magnitudes. FIVE LEADING INDICATORS OF INFLATION Five leading indicators of inflation are described in this section. The first is the price of gold, a commodity that once played an important role in the world monetary system and is still held as a store of value by investors in many countries. The next two indicators are the Commodity Research Bureau (CRB) index of commodity futures prices and the Journal of Commerce (JOC) index of industrial materials prices. These leading indicators are differing broad-based baskets of commodities that play a more important role than gold in current economic activity. The last two indicators are the Center for International Business Cycle Research (CIBCR) leading inflation index and the PaineWebber (PW) leading index. These indexes are composite leading indicators of inflation that combine broad-based commodity indexes with other economic variables believed to be useful in inflation forecasting. The price of gold The price of gold is viewed by some analysts as a leading indicator of inflation because gold is widely held as a store of value. Gold is a store of value partly because of its physical characteristics, such as durability and attractiveness, and partly because of its historical role as the centerpiece of the world monetary system (Laurent). Many countries issued gold coins and held stocks of gold bullion to fully or partially back their paper currencies. Thus, although gold has industrial uses, much of the demand for gold has always been as a store of value. Moreover, the supply of gold is relatively fixed because new gold production is small compared with the existing stock of the metal. Even though gold no longer plays a key role in the world monetary system, the price of gold might be a good leading indicator of inflation. The rationale is that if enough people regard gold as a good store of value, the expectation of rising inflation could cause some investors to shift their funds out of financial assets with fixed nominal interest rates into gold coins or jewelry. Because the gold supply is relatively fixed, the price of gold might rise sharply with even a small increase in demand. …

The State as Agent: Industrial Development in Taiwan, 1952–1972

Abstract: Sub-Saharan Africa’s industrialization experience has been marked by considerable unevenness and uncertainty over the past generation. Buffeted by changing international market conditions, and by the instability of domestic policies, African manufacturers have generally been unable either to substitute successfully for manufactured imports, or to break into increasingly competitive export markets. The austerity conditions of the past decade have led to massive retrenchments for industry in most African countries: faced with shortages of foreign exchange, tight money supply, and depressed local demand, few industrial sectors have avoided significant reductions in capacity utilization and employment.

Measurement of capacity utilization for revenue‐maximizing firms*

Abstract: A dual measure of capacity utilization is developed for multiproduct, revenue-maximizing firms. Under the assumption of revenue maximization, the sensitivity of CU to a change in an individual product price is shown to be directly related to the product-specific scale elasticity. The results are given a simple graphical interpretation.

Is 'High' Capacity Utilization Inflationary?

Abstract: High capacity utilization is sometimes inflationary, but so too is low capacity utilization. These relationships fail to support theories that ignore supply shocks and that maintain nonlinearity of the aggregate supply curve.

Capacity utilization bottleneck efficiency system-CUBES

Abstract: One method to lower manufacturing costs in a manufacturing facility is to get more productivity and/or output from the same set of tools If a manufacturing facility is already operating at its manufacturing line capacity, this task is not trivial One cannot just add more production lots into the manufacturing line This would lead to problems such as high levels of work in process (WIP) and increased cycle times among others Manufacturing line capacity is not the capacity of every tool involved in the production process It is calculated by taking the one tool, "the bottleneck," that has the lowest individual capacity and applying that to the entire manufacturing line Therefore by the same notion, if the capacity of this bottleneck tool can be increased, the line capacity would increase along with it The bottleneck tool controls the manufacturing line's capacity The Capacity Utilization Bottleneck Efficiency System (CUBES) model was developed with this thought in mind CUBES is a model that has been developed to quickly analyze bottlenecks by calculating tool throughput and identifying where efficiency losses are occurring One unique feature of CUBES is that it identifies these losses in a two dimensional grid The S-axis represents losses and/or impacts due to each E10 equipment state and the Y-axis represents losses and/or impacts due to tool speed degradation, rework, setup and hatching This approach along with what-if scenario features allows manufacturing, production, equipment and process personnel to work together and understand what they must do as a team to increase tool throughput and thereby increase manufacturing line production >

Is "High" Capacity Utilization Inflationary?

Abstract: Capacity utilization in U.S. industry features prominently in discussions of inflation. This prominence derives from the widely held viewpoint that "high" rates of capacity utilization are tantamount to resource-shortage conditions or "bottlenecks" that inevitably erupt into price inflation. For instance, an article in Citicorp's Economic Week (January 18, 1994) argues: "In the past, a utilization rate swinging up toward the 84%-85% range was a source of much anxiety. Usually when the rate got that high, production bottlenecks started to appear.... Shortages developed. And soon, key price indexes were shooting up." In the American Banker (January 12, 1994), Stephen Davies points out: "Economists say that, historically, there has been a connection between a healthier industrial sector and rising prices. That's because factories start to run into bottlenecks in which supplies and labor are short" (p. 1). And in an article in Barron's (June 20, 1994), Gene Epstein states, "Capacity utilization should remain below 85%, the assumed inflationary danger zone" (p. 48). A concomitant viewpoint is that when capacity utilization is "low," the economy is in the inflationary safe zone. The threshold defining "high" and "low" rates of capacity utilization is often 85 percent, as the above quotations exemplify. The purpose of the present study is to outline the theory underlying these popular views and to evaluate it in terms of its ability to explain the facts about the U.S. economy. To accomplish this task, the article proceeds as follows. Section 1 isolates and discusses the core features of the theory. Section 2 presents the evidence on the relationship between capacity utilization and inflation and related evidence on the linkage between cyclical GDP and inflation. Section 3 assesses the theory in terms of its ability to explain the evidence. Finally, Section 4 concludes with a summary and suggestions for future research. 1. THE THEORY The theory supporting the view that high rates of capacity utilization are inflationary has not been fully articulated. Yet, it seems to be a variant of traditional Keynesian theory. Figure 1 illustrates the key elements of this theory.(Figure 1 omitted) In this figure, P is the general price level, Y is aggregate real output, Y sup * is the full-employment level of output, Y sup c is the capacity level of output, D sub 1 and D sub 2 denote alternative aggregate demand curves, and S is the aggregate supply curve. Figure 1 shows that the intersection between aggregate demand and supply determines the price level and output. It is a snapshot of the economy over the time horizon relevant for the study of business cycles, the short run. For this horizon, the fixed capacity output level, Y sup c , provides the effective "lid" on the economy. Cyclical fluctuations in output correspond to deviations of actual output, Y, from the constant full-employment output level, Y sup * . Resources are less than fully employed when Y Y sup * --that is, people and capital work overtime. The cyclical fluctuations in output are driven by shifts in the aggregate demand curve, stemming from changes in consumption, investment and government expenditures or in the stock of money. The figure abstracts from economic growth, a long-run phenomenon, which can be imagined as increasing Y sup * and Y sup c gradually over time and also shifting the demand and supply curves outward slowly over time. Such growth is due to improvements in technology and increases in the stock of capital and the work force. In this theory, the aggregate supply curve is nonlinear. This nonlinearity implies that the relationship between the price and output responses to demand shifts depends on the level of real output or, alternatively, the level of overall resource use in the economy. At low levels of output, say Y = Y sub 1 , resources such as labor and capital are underemployed. …

Capacity as a Commitment Instrument in Multi-Market Competition

Abstract: In capital-intensive industries, investments in production capacity can be instruments in competition and, in particular, in entry deterrence. The incumbent firm’s strategy will take into account the identity of the entrant because new firms pose a different threat than established-firm entrants (e.g., importers). The chapter argues that the appropriate framework is multi-market competition, where firms compete in several — product and factor — markets. The framework integrates both recent game-theoretic modeling as well as an older industrial economics, associated with P.W.S. Andrews. An example of the U.S. steel market illustrates that capacity is a commitment instrument only in a special, historic, setting.

Capacity Utilization and Prices Within Industries

Abstract: tt%tjtthe strength of the economic expansion ~II during the past two years has renewed I fears of accelerating inflation As these fears have grown, people have turned to various statistics to substantiate any signs of rising inflation Commodity prices, wages, sales-to-inventory ratios, civilian unemployment rates and capacity utilization rates are some of the statistics commonly used to predict the future path of inflation, These measures embody the basic idea of supply and demand: As the demand for scarce goods increases, their prices must also increase The staff of the Board of Governors of the Federal Reserve System measures capacity utilization as the ratio of industrial production to industrial capacity’ Since the denominator in this ratio normalizes industrial production by a measure of the potential industrial output of the economy the ratio provides a cyclical measure of industrial output The Boards measure of capacity assumes that a firm’s or an industry’s production capacity is fixed over some moderate time horizon, usually due to the quantity of the available plant and equipment stock When firms attempt to produce beyond their “normal” levels, the cost of producing the additional output becomes increasingly expensive if the firm’s production process exhibits diminishing returns-to-scale The higher cost then translates into higher prices Most of the empirical researchers on this subject use total industrial capacity utilization and the consumer price index (CPI) or producer price index (PPI) finished goodsbased measures of inflation Since inflation is an aggregate phenomenon, their focus is undoubtedly justified Yet, the economic analysis that links inflation to capacity utilization should apply to any product market, regardless of its size Therefore, the relationship between price and capacity use should also be evident in industry level data—perhaps more so In this paper, I use two-digit standard industrial classification (SIC) industry measures of capacity utilization to explore the robustness of the relationship between capacity utilization and prices The results suggest that such measures do not have a consistently strong and simple relationship with each industry’s price data

Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions

Abstract: This paper examines whether capital structure decisions interact with product market characteristics to influence plant closing and investment decisions. The empirical evidence in this paper shows that a firm's capital structure, plant level efficiency, and industry capacity utilization are significant determinants of plant (dis)investment decisions. We find that the effects of high leverage on investment and plant closing are significant when the industry is highly concentrated. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. In addition, we find that rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

Capacity Utilization Bottleneck Efficiency System-CUBES

Abstract: One method to lower manufacturing costs in a manufacturing facility is to get more productivity and/or out- put from the same set of tools. If a manufacturing facility is already operating at its manufacturing line capacity, this task is not trivial. One cannot just add more production lots into the manufacturing line. This would lead to problems such as high levels of work in process (WIF') and increased cycle times among others. Manufacturing line capacity is not the capacity of every tool involved in the production process. It is calculated by taking the one tool, "the bottleneck," that has the lowest individual capacity and applying that to the entire manufacturing line. Therefore by the same notion, if the capacity of this bottleneck tool can be increased, the line capacity would increase along with it. The bottleneck tool controls the manufacturing line's capacity. The Capacity Utilization Bottleneck Efficiency System (CUBES) Model was developed with this thought in mind. CUBES is a model that has been developed to quickly analyze bottlenecks by calculating tool throughput and identifying where efficiency losses are occurring. One unique feature of CUBES is that it identifies these losses in a two dimensional grid. The X-axis represents losses and/or impacts due to each E10 equipment state and the Y-axis represents losses and/or impacts due to tool speed degradation, rework, setup and batching. This approach along with what-if scenario features allows manufacturing, production, equipment and process personnel to work together and under- stand what they must do as a team to increase tool throughput and thereby increase manufacturing line production.

Capacity utilization in the USA and inflation: testing for cointegration and Granger causality

Abstract: This paper investigates the long-run and short-run dynamics between capacity utilization and inflation in the USA by using cointegration and error-correction models. It employs monthly data from January 1984 to December 1994. Although each variable in level is found non-stationary by unit root tests, ADF tests and error-correction models fail to confirm any long-run association between capacity utilization and inflation. Despite a lack of cointegration, error-correction models have been utilized to identify Granger causality that has been found to run from total industrial capacity utilization to inflation.

Capacity utilization dynamics and market power

Abstract: In an intertemporal general equilibrium model with imperfect competition, we settle a relationship between factor utilization and markups, via the effect of capacity utilization rate changes on firms' market power when the demand for goods is uncertain. When competition is imperfect, the existence of capacity constraints introduces a distinction between demand and sales price elasticities. At given demand price elasticity, the price elasticity of sales will be smaller the larger the aggregate capacity utilization rateo In such a framework, capacity utilization aifects the propagation mechanism of exogenous disturbances in two ways. The first effect is similar to the effect that bottlenecks and stockouts would have in a perfectly competitive setup; the second effect is related to imperfect competition and works through market power and optimal markup changes. We study these interactions and their implications for the dynamic behavior of sorne key macro variables in response to various "structural" changes. We show that the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate).

Entry preemption through capacity expansion in the U.S. titanium industry

Abstract: This study investigates the impact of expected excess capacity on the probability of firm entry into a single-product oligopoly, specifically, the U.S. titanium industry. Predicted values for excess capacity as well as its components, production, and capacity are generated. By disentangling the components of excess capacity and estimating them independently, it is possible to separate incumbents' discretionary actions regarding capacity expansion, which may preempt entry, from the effects of underlying cycles in demand, which subsequently affect production. These predicted values are utilized in logit models which indicate that expected levels of capacity expansion did appear to decrease the probability of firm entry, while expected levels of production and excess capacity had no effect on the probability of entry into the U.S. titanium industry.

Capital utilization: maintenance costs and the business cycle

Abstract: In this paper we analyze the role played by capacity utilization and maintenance costs in the propagation of aggregate fluctuations. To this purpose we use an extension of the general equilibrium stochastic growth model that incorporates a depreciation technology depending both upon capital utilization (depreciation in use assumption) and maintenance costs. In addition, we argue that the maintenance activity must be countercyclical, because it is cheaper for the firm to repair and maintain machines when they are stopped than when machines are being employed. We show that the propagation mechanism associated to our technology assumption is quantitatively important: the countercyclicality of maintenance costs contributes significantly to magnify and propagate aggregate fluctuations.

Demand Fluctuations and Capacity Utilization under Duopoly

Abstract: This paper studies the impact of uncertain demand on firms' capacity decisions when they operate in an oligopolistic environment We define a two-stage game where firms choose capacity in the first stage without knowing which state of Nature is going to realize, and output levels in the second, knowing which state is realized We prove the existence of a symmetric subgame perfect equilibrium at which firms are in excess capacity compared with the capacity they would choose in the Cournot certainty equivalent game

Cheap Talk and Investment Rivalry in the Pulp and Paper Industry

Abstract: Determinants of the abandonment of previously announced capacity expansions are analyzed in eleven industries within the North American pulp and paper sector. Given the investor's initial confidence, extent of precommitment of resources, and post-announcement fresh news, abandonment's likelihood increases with unanticipated projects subsequently announced by rivals. The process suggests a continual auction with the winning projects and firms having certain systematic properties. Unexpected announcements by rivals promote abandonment only in less concentrated industries; elsewhere completion is actually encouraged. Short-run price competition is found highly sensitive to capacity utilization, and the market's geographic scope is tested.

Regional disparities in pricing strategies of electric utilities

Abstract: There has been considerable disparity in pricing practices across electricity markets in the United States over the past two decades. The greatest contrast in environment which produces different pricing strategies exists between the Midwest and the East. Electric utilities have used promotional rates for reasons either to stimulate the local economy, to reduce excess capacity, or to attract new industry. The purpose of this paper is to identify factors affecting pricing strategies of electric utilities. We also attempt to identify the differences in pricing strategies between electricity firms in the East and in the Midwest.

An Economic Evaluation of Two Alternative Uses of Excess Capacity in the Milking Parlor

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