Questions: A net increase in inventories is considered as investment for the current year. True False

A net increase in inventories is considered as investment for the current year. True False
Transcript text: A net increase in inventories is considered as investment for the current year. True False
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Solution

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The answer is True: A net increase in inventories is considered as investment for the current year.

Explanation:

  1. Definition of Investment in Economics: In the context of national accounts and GDP calculation, investment refers to the purchase of goods that will be used for future production. This includes business investments in equipment and structures, residential construction, and changes in inventories.

  2. Inventories as Investment: When businesses produce more goods than they sell, the unsold goods are added to their inventories. This increase in inventories is considered an investment because it represents goods that are produced but not yet sold, indicating potential future sales.

  3. GDP Accounting: In the calculation of Gross Domestic Product (GDP), investment is one of the components. The formula for GDP is GDP = C + I + G + (X - M), where I stands for investment. Changes in inventories are included in this investment component because they reflect changes in the stock of goods available for future sale.

  4. Example: If a car manufacturer produces 1,000 cars in a year but only sells 900, the remaining 100 cars are added to the inventory. This increase in inventory is counted as investment for that year, contributing to the GDP.

Therefore, a net increase in inventories is indeed considered as investment for the current year in economic terms.

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