What is "spare capacity"?

H

hcour

Guest
I read a comment on the UK economy from Investica that said "The Bank of England is still concerned over the risks of higher inflation, especially with little spare capacity in the economy." What do they mean by that?

Thanks much,
H
 
Ah, I think I found it. "Capacity Utilization", according to Peter Navarro, measures the extent to which a nation's "manufacturing plants are being use to produce manufacturing goods". So little "spare capacity" probably refers to a very high rate of capacity utilization, which may be inflationary because, according to Navarro, "increases in demand will outstrip the ability to produce. At higher levels of capacity bottlenecks may also emerge in the production process."

H
 
Theoretically, if you're operating at 100% capacity, you can arbitrarily raise your prices for whatever it is you're producing in order to ration out supply to the highest bidders. It could take a long time to build additional capacity to satisfy the demand for your product. It was one of the things that Greenspan was most concerned with when he was at the Fed.
 
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