inventory investment


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inventory investment

the INVESTMENT in raw materials, WORK IN PROGRESS and finished STOCK. In contrast to FIXED INVESTMENT, inventories are constantly being ‘turned over’ as the production cycle repeats itself, with raw materials being purchased, converted first into work in progress, then into finished goods, then finally being sold.

The level of inventory investment made by a firm will depend upon its forecasts about future demand and its resulting output plans, and the amount of stock it needs to allow for delivery delays on raw materials and production delays in serving customers with appropriate buffer stocks to cover unforeseen contingencies. Frequently firms find that actual levels of demand differ from their forecasts, so that demand is less than expected and firms find that stocks of unsold goods build up (unintended inventory investment); or that demand exceeds expectations so that stocks run down (unintended inventory disinvestment). The cost of inventory investment includes order and delivery costs, deterioration and obsolescence of stock and interest charges on funds invested in stock. Firms seek to minimize these costs by establishing economic order quantities and optimum stockholding levels. See STOCKHOLDING COSTS.

inventory investment

the INVESTMENT in raw materials, WORK-IN-PROGRESS, and finished STOCK. In contrast to FIXED INVESTMENT, inventories are constantly being ‘turned over’ as the production cycle repeats itself, with raw materials being purchased, converted first into work-in-progress, then finished goods, then finally being sold.

The level of inventory investment made by a firm will depend upon its forecasts about future demand and its resulting output plans, and the amount of stock it needs to allow for delivery delays on raw materials and production delays in serving customers, with appropriate buffer stocks to cover unforeseen contingencies. A firm can minimize these buffer stocks by negotiating JUST-IN-TIME delivery arrangements with suppliers.

Frequently, a firm finds that actual levels of demand differ from its forecasts, so that demand is less than expected and the firm finds that stocks of unsold goods build up (unintended inventory investment); or that demand exceeds expectations so that stocks run down (unintended inventory disinvestment). Such inventory investment and disinvestment tends to occur with downturns and upturns in the BUSINESS CYCLE.

In aggregate terms the rate at which all firms accumulate and run down their stocks influences the level of economic activity. The increase and decrease in stocks operates on the same ACCELERATOR principle as fixed investment, so that widespread changes in business confidence or EXPECTATIONS about future levels of demand influence current stockbuilding decisions, which, in turn, have a magnified influence on levels of output and employment through the MULTIPLIER effect.

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