inventory investment
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Inventory investment relates to the composition of GDP. What is produced in a certain country is naturally also sold, but some of the goods produced in a given year may not be sold the same year, but in later years. Conversely, some of the goods sold in a given year might have been produced in an earlier year. The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment.
If firms produce more than they sell and inventories are accumulated, inventory investment is positive.
If firms sell more than they produce and inventories fall, inventory investment is negative.
Three important relations
These three relations between production, sales and inventory investment can be helpful:
- Inventory investment = production - sales
- Production = sales + inventory investment
- Sales = production - inventory investment
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