Measuring the Chinese regional production potential using a generalized capacity utilization indicator

This paper aims to measure the regional production potential of Chinese provinces based on a generalized capacity utilization (CU) indicator. To develop this indicator, we first categorize the factors of production into fixed and variable inputs. Second, we define the generalized CU indicator as the difference between two directional distance functions constructed relative to the traditional production possibility set (PPS) and a potential-output PPS. This CU indicator can measure the extent to which the current variable inputs of the assessed decision-making unit are utilized to produce the maximal amounts of outputs. Third, we use a dataset of 30 provinces in China to gauge their CU levels in terms of selected inputs and outputs. Finally, based on the empirical results, we draw some policy suggestions for Chinese policy makers.