| The present study has the modest objective of drawing together recent contributions to the theory of capacity utilization, especially the efficient output approach, into a more plausible model of capacity utilization. Unlike the previous models, the present study incorporates the endogeneity of capital utilization in conjunction with adjustment costs. It also shows that a well-conceived measure of capacity utilization can be applied to various economic analyses, such as estimating investment function and total factor productivity, to mention only a few.; The capacity utilization measures estimated for this study are found to be more consistent with the actual performances of the Korea economy than the measures estimated by others. The computed results reveal that Korean manufacturing has adjusted much more flexibly to market demand shocks than it has to the exogenous changes in factor prices. In other words, capacity utilization reflects a quantity adjustment in not-so-flexible price economies. The results of the study also suggest that various government incentive policies to stimulate investment may have resulted in the waste of resources via lowering of the capacity utilization. Contrary to earlier conclusions, an increase in capital stock may not necessarily bring about a higher capacity utilization.; As an application, the present study also proposes a model of total factor productivity which is more firmly grounded on the production theory and in which capacity utilization is one of the arguments. This approach is found to be more effective in relating total factor productivity to business cycle. It also shows that an increase in capacity utilization rate does not necessarily entail a higher total factor productivity. |
