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Chapter 19: Problem 8

An article in the Wall Street Journal stated that a change in inventories "dragged down the overall growth in GDP by nearly a full percentage point" below what it otherwise would have been. For this result to have occurred, is it likely that inventories increased or decreased? Briefly explain.

Short Answer

Expert verified
It is likely that inventories decreased. Decrease in inventories means fewer goods are being produced, which results in lower GDP.

Step by step solution

01

Understanding GDP and Inventories

First, understand that GDP represents the total economic production of a country. Regarding inventories, they are considered part of GDP because they are goods that have been produced but not yet sold. Thus changes in inventories can affect the GDP.
02

Exploring Inventory Increase Impact

Consider an increase in inventories. If inventories are increasing, it means goods are being produced but not sold in the same period. This would represent 'unsold' economic activity, which is still included in GDP measurements. In normal circumstances, an increase in inventories contributes to the growth of GDP.
03

Exploring Inventory Decrease Impact

Now consider a decrease in inventories. Here, the production is less than what is being sold, or companies are selling goods that were part of their stock. This indicates that fewer goods are being produced in the current period, and thus GDP might be reduced.
04

Drawing Conclusion

From the above steps, it can be inferred that if inventories decreased, it could potentially cause a decrease in GDP as fewer goods are being produced. This coincides with the information from the statement which mentioned that changes in inventories dragged down GDP, so it is more likely that the inventories decreased.

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Most popular questions from this chapter

According to research by Rafael La Porta of Tuck School of Business at Dartmouth and Andrei Shleifer of Harvard University, in developing countries, the average firm in the informal sector, or underground economy, employs 4 workers as opposed to 126 workers employed by the average firm in the formal sector. a. What is the informal sector, or underground economy? b. Why would we expect firms in the informal sector to be so much smaller than firms in the formal sector?

What is gross domestic income? Which component of gross domestic income is the largest?

During an intcrvicw with a reportcr, formcr Microsoft CEO Stcvc Ballmer discussed the data compiled on the usafacts.org Web site. Ballmer asked if the reporter knew how many people the government employed and provided the answer: "Almost 24 million. Would you have guessed that?" a. Is local, state, and federal governments spending on salaries and benefits for these employees considered production as measured by GDP? Briefly explain. b. According to data on the usafacts.org site, in 2014 the federal government spent \(\$ 57.3\) billion on Social Security payments to retired and disabled people. Is this federal government spending considered production as measured by GDP? Briefly explain.

Suppose Switzerland has many of its citizens temporarily working in other countries, and many of its firms have facilities in other countries. Furthermore, suppose relatively few citizens of foreign countries are working in Switzerland, and relatively few foreign firms have facilities in Switzerland. In these circumstances, which would you expect to be larger for Switzerland, GDP or GNP? Briefly explain.

In the circular flow of income, why must the value of total production in an economy equal the value of total income?
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