Productive capacity
Productive capacity is the maximum possible output of an economy. According to the United Nations Conference on Trade and Development (UNCTAD), no agreed-upon definition of maximum output exists. UNCTAD itself proposes: "the productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services." The term may also be applied to individual resources or assets; for instance the productive capacity of an area of farmland.[1][2][3]
Definition in more depth[edit]
Productive capacity has a lot in common with a production possibility frontier (PPF) that is an answer to the question what the maximum production capacity of a certain economy is which means using as many economy’s resources to make the output as possible. In a standard PPF graph, two types of goods’ quantities are set. PPF expresses all the possibilities of a combination of these goods that can be maximally produced by a certain economy due to its scarce resources and creates a downward-sloping line. When a certain body reaches any point under the line, the body’s production is under productive potential. When the body’s combination of the two goods included in the graph reaches a point which stands on the PPF line, the body is at its maximum productivity, which creates the highest efficiency on the body. Any other situation cannot be reached because the line gives a limit to the goods’ production that is not possible to be exceeded. In the case of a productive capacity graph, on the horizontal line are defined capital goods and on the vertical line, consumer goods are stated. The functioning of the productive capacity graph is the same as for the above-mentioned PPF graph. The only possible outputs are those that lie under and on the PPF line. If an economy suffers from an under-production, thus an output point can be located under the productive potential, the economy loses its maximum potential output and spare capacity is created. That equals to the fact that the economy has a lower GDP than is possible. An economy employing all the economically active people and all the resources efficiently produces on its PPF line, therefore has the biggest GDP as possible.[4]