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This article reviews how the Federal Reserve measures capacity utilization and explains why capacity utilization has been, and likely will remain, a useful indicator of inflationary pressures and business cycle fluctuations. The authors also explain why economic developments, such as the pace of technological change, increased international trade, and a shift in the share of the workforce to service-producing industries, have not substantially affected the indicator value of capacity utilization. A microtheoretic description of the concept of capacity utilization is offered. Evidence on the plausibility of microeconomic structural interpretations of the relation between capacity utilization and price changes is reviewed.

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Note:We thank an anonymous referee and participants at numerous seminars for helpful comments.

Note:We thank an anonymous referee and participants at numerous seminars for helpful comments.

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