Final answer:
Inventories contribute to GDP by counting as investment when goods are produced but not yet sold, boosting GDP if businesses manage inventories well. The National Income Approach measures GDP as the total income from goods and services produced, aligning with output value. Yet, some GDP increases, like those due to disasters or fear-induced spending, don't necessarily indicate improved economic health.
Step-by-step explanation:
Inventories can give Gross Domestic Product (GDP) a small boost when businesses accumulate unsold goods. These unsold goods are counted as investment, increasing the GDP through the Expenditure Approach. If businesses are doing better than expected and inventories decline, it shows they are successfully selling their products, which can mean that actual sales are surpassing expectations, also contributing positively to GDP. Conversely, if inventories increase because sales are lower than expected, it signifies that businesses overestimated consumer demand and produced more than they were able to sell.
National Income Approach is an alternative way to measure GDP, focusing on the total income generated by the production of goods and services, which should equate to the value of the total output. Factors that can fuel GDP growth include investments in physical capital (like machinery and equipment), increases in human capital (through education and training), and technological advancements. These investments enhance a nation's productivity and, in turn, its GDP.
However, it's important to note that a rise in GDP doesn't always signify an improvement in social welfare or economic health. For instance, rebuilding efforts after a disaster may temporarily boost GDP but don't reflect a positive economic event. Likewise, expenditures driven by fear, such as increased security measures, may up GDP without benefiting overall societal well-being.