Question

If business inventories decrease, what effect does it have on the GDP? What effect does the business inventories have on the GDP?

A. Increases GDP

B. Decreases GDP

C. No effect on GDP

D. Inconsistent effect on GDP

Answer 1

A decrease in business inventories typically indicates that goods are being sold, which increases GDP. However, if inventories are decreasing because production is down, this might lead to a decrease in GDP.

Step-by-step explanation:

If business inventories decrease, it generally increases GDP. Inventories are counted as an investment component of GDP; thus, when a business sells from its inventory, the sale is considered as part of the current GDP. Therefore, if the inventories held by businesses decrease because items are sold, this indicates a higher level of production and sales, contributing to an increase in GDP.

From another perspective, high inventory levels can reflect unsold goods, suggesting weaker demand or overproduction, which could potentially signal a slowdown in economic activity. Conversely, lower inventory levels may suggest that demand is strong and that businesses are selling their goods rapidly, which is typically a positive sign for GDP. However, if inventories decrease because companies are producing less and not replenishing their stock, this could indicate a decrease in economic activity and hence lower GDP.