Problem 6 A business firm produces a good ... [FREE SOLUTION]

Chapter 7: Problem 6

A business firm produces a good this year that it doesn't sell. As a result, the good is added to the firm's inventory. How does this inventory good find its way into GDP?

Short Answer

Expert verified

Goods that are produced but not sold within a year, and therefore added to a firm's inventory, still contribute to the GDP. This is due to GDP accounting for all goods produced, not just sold. Unsold goods contribute as 'increased inventory investment'.

Step by step solution

Understanding GDP

Gross Domestic Product, or GDP, is defined as the total value of all goods and services produced within a country in a given period, often a year. It represents the monetary value of all final goods and services produced.

Understanding Unsold Inventory Goods in GDP

Even if a good produced by a business remained unsold and added to the company's inventory, it is still considered part of the GDP. It's included because GDP measures production, not sales. Inventory investment which is a part of investment component of GDP includes changes in business inventories. An increase in inventory level is viewed as an investment.

How does This Add to GDP

So if a company produces a good, but does not sell it, and instead keeps it in its inventory, this good is still a part of GDP as 'increased inventory investment'. This is because it represents a good that was produced within the given year, which is what GDP measures.