Question

Describe the role of business inventory change in determining the equilibrium level of GDP and changes in the level of GDP.

Answer 1

Answer - The change in the level of inventory is included in the GDP in the value added method as well as the expenditure method. It is calculated as Closing inventory - Opening inventory. The investment in the equlibrium GDP also includes the inventory investment. Thus it affects the equilibrium.

If the closing inventory will be more than opening , the level of GDP be more as more has been produced with respect to previous year. If the change is negative , this will decrease the value of GDP.