Consider the following statements:
(A) Inventory is a stock variable.
(B) Fixed business investment refers to the addition of housing facilities.
(C) A change in the inventories of a firm is treated as investment.
(D) An unexpected rise in sales leads to unplanned accumulation of inventories.
(E) In the identity GDP = C + I + G + X − M, I stands for both planned and unplanned investment.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (E) only
Inventories and the categories of investment.
(A) Inventory is a stock variable. — Correct. Inventory is measured at a point of time, so it is a stock.
(B) Fixed business investment refers to the addition of housing facilities. — Incorrect. Addition of housing is residential investment. Fixed business investment is machinery, factory buildings and equipment.
(C) A change in the inventories of a firm is treated as investment. — Correct. Inventories are capital, so a change in them is investment.
(D) An unexpected rise in sales leads to unplanned accumulation of inventories. — Incorrect. An unexpected rise in sales leads to unplanned decumulation.
(E) In the identity GDP = C + I + G + X − M, I stands for both planned and unplanned investment. — Correct. In identity (2.6), I covers planned and unplanned investment.
NCERT (2026-27): “2.2.1 The Product or Value Added Method … In economics, the stock of unsold finished goods, or semi-finished goods, or raw materials which a firm carries from one year to the next is called inventory. Inventory is a stock variable. …” “2.2.1 The Product or Value Added Method … Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment. There can be three major categories of investment. First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm. The second category of investment is the fixed business investment, which is defined as the addition to the machinery, factory buildings and equipment employed by the firms. The last category of investment is the residential investment, which refers to the addition of housing facilities. Change in inventories may be planned or unplanned. In case of an unexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories. …” “2.2.3 Income Method It is to be noted that in identity (2.6), I stands for sum total of both planned and unplanned investments undertaken by the firms. …” |