Industrial Production

Updated on January 29, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Industrial Production?

Industrial production refers to the output of the business entities in the industrial sector. The primary purpose is to measure the overall production of the industrial sector comprising industries like manufacturing, mining, and utilities in the economy. 

Industrial Production

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Industrial Production (wallstreetmojo.com)

Industrial production processes help in evaluating the change in the industrial sector. It acts as a metric contributing to the creation and improvisation of economic policies and strategies for the government. In addition, the measure provides thoughtful insight into the total demand arising in the industries like manufacturing, mining, and utility.

Key Takeaways

  • Industrial production encompasses goods and services produced by industries like manufacturing, mining, and utilities. It is a metric that helps measure the total output produced by industries in a specific period.
  • A formula given by German economist Ernst Louis Étienne Laspeyres is popular for calculating it. The formula is known as the Laspeyres index.
  • The IPI (Industrial Production Index) is a statistic compiled and published by different organizations in different regions. For example, the Central Statistical Organization (CSO) typically compiles and publishes the IPI index once every month. Similarly, Eurostat makes IPI data available in Europe.

Industrial Production Explained

Industrial production refers to the total production of the entire industries in the country’s economy. These industries concentrate more on the manufacturing sector. As a result, it serves as the backbone of the economy. In addition, more than half of the industries use their products in retail production. Therefore, it contributes a lot to the economy. However, the production rate can differ widely for others.  

Economists calculate industrial production data in every economy, mainly in the manufacturing units. This unit includes mining, automotive, electric, gas, metal, equipment, and others. As a result, the major powers of the globe have introduced an index that allows them to monitor the change in the industrial sector production. Countries with high industrial production growth rates have a high demand for infrastructure materials. Thus, it generates employment in the economy.  

Among the major factors, consumer patterns and demand affect industrial output. As a result, the industrial production growth rate is sensitive to reduced or fluctuating consumer demand. For example, if the consumer’s demand changes from steel to pottery, then the production of the metal industry will fluctuate. As a result, it causes a change in the gross domestic product (GDP) contribution from the metal industry. 

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Examples

Let us look at the examples of industrial production processes to understand the concept better: 

Example #1

Kevin and Sheldon have a family business engaged in the metal industry. Due to uncertain war conditions, the demand for metal increased. As a result, Kevin, Sheldon, and the other people engaged in metal mining benefited greatly. Thus, in three months, the metal industry output rose. 

However, after a few months, the businesses started facing losses because of the weak economic activities in the country and rain. Similarly, other businesses also faced a fluctuating demand. As a result, a change in the industrial output caused the index’s value to fall. However, if all industries in the economy perform well, the industrial output will surge. Yet, it seems impossible as it is impossible for any business to always profit

Example #2

According to the reports launched in October 2022, the industrial production of the United States (U.S.) saw a surge of 0.4%. The factory output, including computers, electronics, and other items, rose by a similar percentage. Furthermore, while the mining output grew by 0.6%, the utility sector saw a downfall of 0.3%. In contrast, the eurozone industrial production saw a rise of 4.9% in this area. 

Industrial Production Index

Industrial Production Index (IPI) is an economic metric or index that helps measure the change in the output of the industries. It evaluates the performance of industries based in the mining, gas, manufacturing, electric, oil, and utility sectors. Thus, in the middle of every month, the Federal Board releases the IPI reports that determine the change in the industrial output. It also serves as an important indicator for economists and investors. 

Let us look at the formula for calculating IPI for the industrial sector:

where,

  • IPI: Industrial Production Index
  • Q1: Current quantity
  • Qo: Base year quantity
  • Wo: Weights for the base year

For calculating the IPI, economists use the above mathematical formula from the German economist Ernst Louis Étienne Laspeyreshe.

Industrial Production vs Capacity Utilization

Although industrial production and capacity utilization are metrics for economic growth, they differ slightly. While the former concentrates more on measuring the output of the industries, the latter measures the actual capacity used by the industry. The history of the former dates back to the mid-1920s in the United States. In contrast, companies started measuring their capacity utilization in the late 1950s.

BasisIndustrial ProductionCapacity Utilization
MeaningIt focuses on the change in the output of the industrial sector.It focuses on the capacity utilized by the industry.
PurposeTo measure the output produced by the industries.  To gauge the capacity used by the industry.
IndexesIndustrial Production Index (IPI).Capacity Utilization Rate.

Frequently Asked Questions (FAQs)

Why is industrial production important?

Industrial output forms a major part of the economy, along with agriculture and the service sector. Analyzing industrial production is significant to understanding and measuring the industrial sector’s output. In addition, it helps track the change in the output produced between years. 

What are the factors of industrial production?

Individuals use the resources that make up the economy’s foundation as production factors to create commodities and services. The four categories of factors of production that economists distinguish between are land, labor, capital, and entrepreneurialism.

What is industrial production engineering?

Production engineering is a section that focuses on creating and applying technologies in different parts of production and delivery. It includes management science, manufacturing technology, engineering, and others.  

This has been a guide to what is Industrial Production & its meaning. We explain its index, compare it with capacity utilization and its examples. You can learn more about finance from the following articles –