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Volume :31 Issue : 118 2005      Add To Cart                                                                    Download

Measuring Capacity Utilization Using A short-Run Cost Function: An Application To Bahrain Economy

Auther : Bassim A. Shebeb

     The main objective of this study is to measure and analyze one of the major components of economic performance, namely capacity utilization, in the Bahraini economy over the period from 1984 to 1999.
     Making use of the contemporary developments in dual cost theory, a well-defined method for empirical estimation of capacity utilization was established in this paper.  An empirical model, Cobb-Douglas short-run variable cost function, was employed as an application of this dual-cost estimate of capacity utilization in Bahrains economy.
     The findings of this study showed that as presently structured, industries in the Bahraini economy, in general, have experienced capacity under-utilization.  The estimated maximum level of capacity utilization was 77.8% with annual average of 58.6% over the time period 1984-1999.  This implies that there is significant room for increasing production levels with no need for additional investment in new capital.  One possible justification of excess capacity in Bahrains economy ( capacity under-utilization ) may be related to the small size of the Bahraini markets.  Three main recommendations are given for full capacity utilization:  first; rationalization of the existing structure of some industries and temporary restrictions on new entry, second; the adoption of trade policies in support of regional integration, in order to enlarge markets for existing industrial capacity; third; technological adaptation that improves production efficiency particularly needed in case of small-market economy such as Bahrain.

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