Assertion (A): The inventory investment of a firm in a year can be negative.
Reason (R): When a firm decides to keep some stocks for various reasons, it is called planned inventory investment.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): The inventory investment of a firm in a year can be negative. — True. Inventory investment is the change in stocks. When stocks are run down, the change is negative.
Reason (R): When a firm decides to keep some stocks for various reasons, it is called planned inventory investment. — True. This is one of the two reasons for inventory investment.
A is about the sign of inventory investment. R is about one cause of inventory investment.
Why R does not explain A? Keeping stocks on purpose tells us why inventory investment happens. It does not tell us why it can be below zero. The real reason is that inventory investment is the change in stocks: a depletion of inventory is negative inventory investment.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … It should be noted that inventories or stocks refers to that part of output produced which is not sold and therefore remains with the firm. Change in inventory is called inventory investment. It can be negative as well as positive: if there is a rise in inventory, it is positive inventory investment, while a depletion of inventory is negative inventory investment. The inventory investment can take place due to two reasons: (i) the firm decides to keep some stocks for various reasons (this is called planned inventory investment) (ii) the sales differ from the planned level of sales, in which case the firm has to add to/run down existing inventories (this is called unplanned inventory investment).” |