10 Investment in inventories

Printable version (PDF) of Chapter 10 (June 30, 2008)

Introduction

10.1 In the Income and Expenditure Accounts, investment in inventories is estimated for the agricultural and non-agricultural business sector and for the government sector.

10.2 Inventory fluctuations essentially represent the gap between aggregate production and final demand in any given period. Inventories can play a crucial role in generating swings in economic activity despite the fact that changes in inventories are a relatively small component of GDP. However, their importance stems from the fact that they typically fluctuate to a substantially greater extent than other GDP components—and can either be strongly positive or strongly negative. The average absolute quarterly contribution of inventory movements to quarterly growth can be large, sometimes making it a major factor in GDP growth.

10.3 Changes in inventories have always had a major influence on business cycles. However, the role of inventories is evolving, as indicated in the article The Changing Role of Inventories in the Business Cycle.1 The article deals specifically with non-farm inventories and concludes that the economy benefits when businesses manage their inventories better. Changes in farm inventories can have a significant effect on changes in the gross domestic product. Changes in such inventories are caused by developments in the global economy as well as by weather conditions or, as has been the case more recently, by national and international events such as the mad cow crisis.

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Notes

1. Cross, P. and Salvatore, G. 2003; "The Changing Role of Inventories in the Business Cycle". Canadian Economic Observer, catalogue 11-010.

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