Briefly explain how capacity utilization rates are used by forecasters

Briefly explain how capacity utilization rates are used by forecasters.

What will be an ideal response?

ANSWER

Capacity utilization rate is the ratio of production to capacity. Higher capacity utilization rates give firms the incentive to expand capacity through investment in new structures and equipment. Forecasters estimate that the threshold level for capacity utilizations rates to be around 83 to 85 percent. Capacity utilization rates above this threshold suggest that businesses will increase investment in structures and equipment to expand capacity to meet expected demands for their products. Capacity utilization rates below this threshold suggest that businesses will cut back on capital spending and focus their attention on replacement of inefficient facilities.