Inventory investment theoretically leads to sales and therefore should be factored into GDP. Inventory decline will lead to a decline in GDP.

You are watching: Why are changes in inventories included as part of investment spending


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Video Transcript

so here will be looking at how inventory is factored into GDP. So inventory is kind of the investment that companies make on the goods that they are planning on selling and inventory is factored into GDP. So inventory investment, uh, if it increases or if there say is $100 million of inventory investment over the course of year GDP will increase by that 100 that change of 100 million. Um, if inventory investment decreases 100 million, that will also be reflected in GDP. However, when looking at inventory, I think it's important to note that any major swings, any massive peaks, massive valleys are not a good thing. They generally indicate US and economic problems. So first of all off, there's a massive increase in inventory that likely means that goods are being sold. So companies air kind of over investing, and they're stuck with, um, you know, a bunch of goods that they cannot sell on. This is a problem for them. This can happen, you know, often at the beginning of a recession, when a company might not be prepared for it. Um however, on the flip side, a a massive decrease in inventory uh is potentially even more damaging because if inventory decreases significantly, it's likely due to the fact that a company believes that there is not enough demand for their goods on and they so they will produce much less of it. Um, for example, uh, if there was a $1 billion decrease in inventory investment in 2008 this would likely be due to the fact that companies would understand that many people wouldn't be buying their goods so they wouldn't spend the money. Um, Teoh make their inventory figure and this would lead to a decline in inventory. Um, and this is why it is factored into GDP decline inventory. Generally, I indicates, uh, a economic decline and therefore is reflected in a decline in GDP.