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BPEA Article

Discussion of the Bosworth and Poole Reports

Abstract

SEVERAL PARTICIPANTS QUESTIONED the use of traditional capacity utilization indexes for analyzing price movements. Alan Greenspan contended that the concept of capacity that is most relevant to price determination is the effective capacity that is available in a very short period of time. For example, a company may be operating at 80 percent of capacity, as measured by the McGraw-Hill index, but its capability of producing goods with a four-week lead time may be only 3 percent higher than its current rate of production. He suggested that we recognize that the McGraw-Hill capacity figures implicitly measure what is available to a particular company or industry, given the long lead time necessary to obtain the needed workers or materials and to get idle facilities into operation. Greenspan argued that order backlogs and the pace of new orders are more appropriate statistics for price analysis than is the level of capacity utilization. He pointed out that these order measures have risen rapidly and are at historically high levels in many industries.

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