ili. What is the ditterence of inventory investment from fixed investment? Expla
ID: 1126921 • Letter: I
Question
ili. What is the ditterence of inventory investment from fixed investment? Explain. Imagine that at the close of business on December 31, 2015 a grocer has 10 loaves of bread, each valued at the wholesale baker's price of $.80. At the close of business on March 31, 2016, the grocer has 15 loaves of bread on the shelves. (a) What is the implication of these numbers for the contribution of the grocer's inventories to GDP in the first quarter of 2016? (b) How would your answer for point (a) change, if on March 31, 2016, the grocer has 3 loaves of bread on the shelves. Make a common conclusion about when inventory investment is (i) positive, (i) negative, (iii) zero. IV. Explain the difference between gross investment, replacement investment, and net investment. Which component of investment cannot be gross but only net? Explain why. What is the role of net investment in the economy? Explain and show on the PPF graph.Explanation / Answer
Ans)
Inventory investment is change in stocks of raw materials, semi finished goods, final goods during a year. Whereas fixed investment is expenditure on purchase of fixed assets such as machinery and capital.
a) with increase in loaves of bread in quater from 10 to 15 implies aggregate demand is slowing down with increasing inventory. Firms will cut back production and reduce output.
b) Now instead he has 3 loaves of bread instead of 15 then production will increase which indicates higher aggregate demand that's why loaves of bread are less in 2016 than 2015. So there will be increase in GDP.
Positive inventory investment indicates that economy has added to its stock of inventory i.e there is increase in inventory and firms reduce production because sales fall. Negative inventory investment is reduction in inventory where firm increases its production beacuse sale has increased. When there is no change in unplanned inventory investment then it is zero.
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