Consider the following statements:

1. Inventories are treated as Capital.

2. Change in the inventory of a firm is treated as an investment.

3. Change in inventories is based on business cycles.
Which of the above statements is/are correct?

Question

Question

Answer 1

The correct answer is All of the above.

Key Points

In economics, the stock of unsold finished goods, or semi-finished goods, or raw materials that a firm carries from one year to the next is called inventory.
Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Hence, Statement 1 is correct.
Therefore change in the inventory of a firm is treated as investment. Hence, Statement 2 is correct.

Additional Information

There can be three major categories of investment
- First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm.
- The second category of investment is the fixed business investment, which is defined as the addition to the machinery, factory buildings, and equipments employed by the firms.
- The last category of investment is the residential investment, which refers to the addition of housing facilities. Change in inventories may be planned or unplanned.
In case of an unexpected fall in sales, the firm will have unsold stock of goods that it had not anticipated.
Hence there will be an unplanned accumulation of inventories. In the opposite case where there is an unexpected rise in sales, there will be unplanned decumulation of inventories.