Example of inventory investment- accounting system, Macroeconomics



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

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