Example of inventory investment- accounting system, Macroeconomics

 

 ACCOUNTING SYSTEM-EXAMPLE IV 

Now consider the economy as in example III. In the next year same outputs were produced and the same incomes were paid out. However, the households decided not to consume all the income but save some of it and stuff it under their mattresses. They bought extracts worth only Rs.5, chemicals worth Rs.20 and bottled jam worth Rs.300. The market value of all final sales to households is only Rs.325. The GNI is Rs.360 as before. Thus apparently GNP does not equal GNI. The problem is Rs.35 worth of goods which out of the Rs.360 worth produced have remained unsold. The three firms have to make an unplanned inventory investment (stocks of finished goods) of Rs.35. The accounts are as follows: 

                                       Production Account 

 

                          1258_Production Account13.png

                                     Household Account 

 

                          1923_Production Account13.png

                           Savings and Investment Account 

                         517_Production Account13.png

 

Now GNP equals the value of final sales plus net increase in stocks or net inventory investment.

GNP = C + I = 325 + 35 = 360

where C denotes consumption and I denotes investment (inventory). GNI is also 360.

Note that there is something missing in this example. There must be some way of making the savings of households available to the firms for financing the inventories. It could be direct lending from households to firms, or equivalently acceptance of promissory notes in lieu of wages and profits of Rs.35 or a financial institution which accepts deposits from households and lends to firms. But in the last case some new complications will be introduced. Do you see them? 

 

 

 

 

Posted Date: 9/13/2012 1:21:10 AM | Location : United States







Related Discussions:- Example of inventory investment- accounting system, Assignment Help, Ask Question on Example of inventory investment- accounting system, Get Answer, Expert's Help, Example of inventory investment- accounting system Discussions

Write discussion on Example of inventory investment- accounting system
Your posts are moderated
Related Questions
Evaluating Legal Prices: Collect information regarding the minimum wage. State the procedure of this legal price, assess its impact on the market for labor, and evaluate the extent

An economy shows the following features C=50+0.9(Y-T) T=100 I=100-5i G=100 L=0.2Y-10i M/P=100 X=20 M=10+0.1Y a)Obtain the IS and LM for this economy b)Find out the equilibrium inc

Define elasticity of supply. What factors influence Elasticity of Supply? There is only one type of identifiable elasticity of supply measuring the responsiveness of market sup

What are the pros and cons of outsourcing in order to keep prices down?

what wil hapen to the real wage if the nominal wages and prices rise at the same rate per year?

Which economic system is the best solution to handling a crisis of epic proportion?

Determinants of balance of payments: Broadly speaking, trend behaviour of merchandise exports and imports along with their  terms of  trade,  net invisible earnings and autono

Calculating interest rates on a yearly basis If maturity is different from one year, interest rate is generally recalculated to a corresponding one year rate. For instance con

Export Promotion Measures: While a number of  existing  export promotion schemes  such as  incentive related to Duty Free Replenishment Certificate (DFRC), Duty Entitlement Pa

circular flow of national income?