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CHANGE IN PRIVATE INVENTORIES:

The increase or decrease in the stocks of final goods, intermediate goods, raw materials, and other inputs that businesses keep on hand to use in production. Formerly termed change in business inventories, this is one of two main categories of gross private domestic investment included in the National Income and Product Accounts maintained by the Bureau of Economic Analysis. The other category is fixed investment. Change in private inventories tend to be about 3 to 5 percent of gross private domestic investment.

Working Capital

Change in private inventories is NOT what most often comes to mind when the topic of business investment arises. However, inventory changes are a form of investment because firms use inventories to smooth the flow of production and sales just like they need factories and equipment to produce goods. In fact, inventories are frequently termed "working capital."

To illustrate, suppose a retail operation such as the MegaMart Discount Warehouse Super Center opens a new store. This requires a significant capital investment. First, MegaMart constructs the building, which falls in the structures category of fixed investment. Then it installs shelves, cash registers, computer terminals, and shopping carts, which are in the producers' durable equipment category of fixed investment.

But making only these "typical" capital investment expenditures is NOT all that MegaMart needs. It cannot commence operation until it has an inventory of products to sell. MegaMart must stock its shelves before opening its doors. As such, MegaMart's capital investment for its new store includes structure, equipment, AND inventories.

One reason that firms keep inventories, especially inputs, is to maintain a continuous stream of production and sales in case of input supply shortages. Another reason to keep inventories, especially final goods, is to meet any unexpected surge in demand. Firms want to avoid lost sales that result because finished products are unavailable when a customer is ready, willing, and able to buy.

Two Categories

Two categories of private business inventory changes are included in the National Income and Product Accounts: farm and nonfarm. While variation is the norm for these two categories, the nonfarm component tends to be the bigger of the two. Nonfarm is further separated into the subcategories of manufacturing, wholesale trade, and retail trade, with manufacturing usually the largest of the three.

Business Cycles

Change in private inventories tend to be about 3 to 5 percent of gross private domestic investment. But while small, they are a highly volatile component. The reason is that inventories act as a buffer between aggregate expenditures and aggregate production. If aggregate expenditures exceed aggregate production, then business inventories fall. If aggregate production exceeds aggregate expenditures, then business inventories rise. This volatility is an indicator of business-cycle instability, if not an outright cause.

While "planned" changes in these inventories is just a matter of doing business, unplanned changes frequently result from business-cycle instability. When the economy begins to dive into a recession, one of the first signs of trouble is an increase in "unplanned" business inventories--demand for products tapers off and inventories start to accumulate. This usually occurs before workers are laid off and often before anyone is fully aware of the problem. Likewise, as the economy begins to recover, the first sign is a reduction in business inventories as demand picks up. Some economists even go as far as to argue that the periodic build-up and draw-down of business inventories is not just an indication of business cycles but a prime cause.

<= CHANGE IN DEMANDCHANGE IN QUANTITY DEMANDED =>


Recommended Citation:

CHANGE IN PRIVATE INVENTORIES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: June 24, 2019].


Check Out These Related Terms...

     | fixed investment | personal consumption expenditures | government consumption expenditures and gross investment | net exports of goods and services | durable goods, consumption | nondurable goods, consumption | services, consumption |


Or For A Little Background...

     | gross private domestic investment | gross domestic product, expenditures | investment | investment expenditures | business sector | gross domestic product | production | product markets | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |


And For Further Study...

     | macroeconomic sectors | circular flow | business cycles | gross domestic product, ins and outs | gross domestic product, income | gross domestic product, welfare | net domestic product | national income | personal income | disposable income | gross national product | real gross domestic product | saving | investment business cycles | investment, production possibilities |


Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis |


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