Question

How does an increase in Business Inventories have both a positive and negative impact on the National Economy?

Answer 1

Inventories in business are any item of property held in stock by a firm, including finished goods ready for sale, goods in the process of production, raw materials, and goods that will be consumed in the process of producing goods to be sold or intermediate goods . So defining inventory in simple words : Inventory = Production - Sales .

Increase in inventories means the production is higher than sales . This can be an indication of two situations . Firstly , demand for the product is low and second production is much efficient . Increase in inventories cause stock piling of goods for future use . Increases in business inventories are counted in the calculation of GDP so that new goods that are produced but go unsold are still counted in the year in which they are produced . So it helps increase GDP of an economy . These inventories provide as emergency supply during a calamity or destruction of natural resources . Inventories cause increase in assets of firm . Icrease in inventory means production is higher than sales which helps to increase supply and brings down inflation .

Now on the negative side , it indicates lack of aggregate demand in the economy . Increase in inventory will lead to future reduction in production and underutilization of resources in the economy .