Inventory investment

Inventory investment is a component of gross domestic product (GDP).

A positive flow of intended inventory investment occurs when a firm expects that sales will be high enough that the current level of inventories on hand may be insufficient—perhaps because in the presence of very short-term fluctuations in the timing of customer purchases, there is a risk of temporarily being unable to supply the product when a customer demands it.

They are separate, unrelated events: one is based on deliberate actions to adjust the stock of inventories, while the other results from mispredictions of customer demand.

If these are indeed equal for a particular time period, there is no unintended inventory investment and there is goods market equilibrium.

This is reflected in the presence of positive or negative unintended inventory investment.

[3] Starting from some point in the business cycle, some group (consumers, government, purchasers of exports, etc.)

This may come as a surprise to producers, who initially experience negative inventory investment as their sales have unexpectedly exceeded their production.

Then there is positive unintended inventory investment as firms are caught by surprise by the external drop in demand and they fail to simultaneously lower their production.

At this point there is negative unintended inventory investment as firms are caught by surprise by the external increase in demand and they fail to simultaneously raise their production.