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?

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.