Economics: A Contemporary Introduction 9th Edition by William McEachern

Exercise 5

INVESTMENT In national income accounting, one component of investment is net changes in inventories. Last year's inventories are subtracted from this year's inventories to obtain the net change. Explain why net inventory increases are counted as part of GDP. Also, discuss why it is not sufficient to measure the level of inventories only for the current year. (Remember the difference between stocks and flows.)