• Endy Dwi Tjahjono
  • Jardine Husman
  • Desthy Sianipar


This study estimates the level of capacity utilization using the dual cost approach in which capacity utilization is measured by the deviation of shadow cost to observe cost. This approach provides valuable economic analysis which is not offered by the traditional or engineering approach, such as the production cost structure and the production system efficiency. The estimation results of 1996-2003 annual data on nine industries sub sector using panel data shows that the estimated capacity utilizations based on dual cost approach tend to exceed those of traditional approach. However, in general, the level of capacity utilization is still below full capacity although some of the industries have reached the level of 80%. The empirical results also shows that in term of output gap indicator, the dual cost capacity utilization outperforms the traditional one so that it can be used as a better tool in monetary policy formulation process.

Keywords: Capacity utilization, Capital and Investments, Cost Function, Panel data

JEL Classification: C23, D24, E22


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