QUESTION 1:

Consider the following scenario and determine whether it would be included in GDP, the category that it would affect, and the net change in GDP:

You are a manufacturer, and you produce 1,000 units of a good and store it in your warehouse as inventory.

ANSWER:

Would it be included in GDP?Yes, it would be included in GDP

Would category affect? It would affect theinvestment category

The net change in GDP?Increase

Explanation:

Inventories produced in a certain period will be included in the GDP for that period, even if they have not yet sold. That's why the 1,000 units of a good produced by the manufacturer will be part of the GDP under the category of investment. This production will increase the GDP by 1,000 units since these are new additional goods produced within the country.

QUESTION 2:

I agree with your answer. I realized that investment in Economics means the inventory in Accounting. What I am not so clear about is when the firm sells the investment next year, the amount is added to consumption and deducted from inventory. My question is, what do we use to add to consumption - the selling price or the investment cost? What do we remove from investment: the selling price or investment cost?

This is a question related to the topic of GDP.

ANSWER 2:

Investment in Economics is composed ofnew construction, new durable capital equipment, and increased stocks or inventories. Not only inventories, so they are not very much the same in Economics and Accounting. Investments have a broader meaning in Economics.

Theselling priceis the one used when the goods in the inventories last period are sold in the next period. This would reflect in consumption. The selling price is also used as a basis when the inventories under-investment will decrease as a result of being sold.

Explanation:

Remember that the values used in calculating GDP are the(selling) pricesof the final goods and services in that period, not the cost, such as inventory costs.

QUESTION 3:

This is an excellent point about using the selling prices of final goods and services in that period. However, this could result in a negative investment value. For example, in year 1, 1000 units with a total of $1000 are stored as inventory investments. Then, in year 2, these inventories are sold at $2000. So, we have YEAR 1 GDP = Investment : 1000 + Consumption: 0 => GDP = 1000 YEAR 2 GDP = Investment: 1000 - 2000 + Consumption: 2000 YEAR 2 GDP = Investment: -1000 + Consumption: 2000 => GDP = 1000 This makes YEAR 2 GDP stick at 1000, with investment having negative 1000. Is this more realistic: YEAR 1: investment: 1000 + Consumption: 0 => GDP = 1000 YEAR 2: Investment: 1000 - 1000 + Consumption: 2000 YEAR 2: Investment: 0 + Consumption: 2000 => GDP = 2000 Here, I used the cost of goods sold for investment and used the selling price for consumption. What is your opinion?