INTERPRETATION AND MEASUREMENT OF CAPACITY UTILIZATION - THE CASE OF KOREAN MANUFACTURING

This paper focuses attention on the conceptual difference between opti mal (ex ante) and actual (ex post) capacity utilization (CU). The dyna mic version of the efficient output approach to capacity utilization w hich this paper presents is theoretically superior to other alternativ e approaches. Our concept of optimal CU has been applied to estimate C U measures for Korean manufacturing. We find that our measure of CU ex plains the trends and cycles in Korean economy rather convincingly, an d that Korean manufacturing has adjusted much more flexibly to market- demand shocks than it has to exogenous changes in factor prices. From the examination of the determinants of CU we find that, while wages an d material prices have positive effects on CU, energy prices and capit al stock have negative effects. The study also implies that overambiti ous government incentive policies to stimulate investment may have an adverse effect on capacity utilization.