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Relationship between consumption expenditures and inventory

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Since inventories are not a large component of GDP, how can they affect GDP so sharply? How will the replenishment cycle affect GDP in the near future?

I know that there is a relationship between consumption expenditures and inventories and that there is an interdependence, but I am not sure how to answer this. It most likely has something to do with the multiplier effect. Can you help me on this?

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This solution responds to the question: Since inventories are not a large component of GDP, how can they affect GDP so sharply?

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Changes in inventory is the difference between Real GDP (Y), and Aggregate Demand (AD).

Here we must remember that only goods produced during the current year are included in the calculation of GDP.

When AD > Y, suppliers would see that there is a shrinkage in inventories, hence they increase supply to match AD. This causes GDP to increase. In their effort to increase production, ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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