Inventory Detailed

Inventory Detailed

Inventory, a detailed list of a trader's stock which is periodically valued to enable a balance sheet to be prepared. The goods are normally counted, measured or weighed and an assessment or valuation of the inventory made. The generally accepted basis for the valuation of the stock-in-trade or inventory, if the goods are in a readily saleable condition, is either the original cost or the price at which they could be bought in the open market, whichever is the lower.

The inventory of a business at a given time is difficult to estimate because calculation has to be made while trading is taking place, and goods are accordingly constantly coming in and going out. It is necessary to take precautions to ensure that errors do not arise from this cause, and many businesses prefer to close theft premises when they are compiling their inventory, despite the corresponding loss of trade.

Inventory investment is the increase in the (real) value of business stocks and work in progress in a given period. If the value has fallen there has been inventory disinvestment.

Inventory Investment Cycles, periodic fluctuations in inventory investment, that is, the increase (or decrease) in business stocks and work in progress in a period. Although inventory investment is a relatively small part of total demand in the economy, it is extremely unstable for two reasons. First, the demand for stocks tends to change in response to alterations in the rate of increase or decrease in the demand for goods and services. Secondly, changes in the demand for output initially cause stocks to be either piled up or run down. If the changes in demand persist, the changes in production tend to be magnified by the need to adjust stocks to a more normal level; there is then a tendency to under-adjustment because the changes in output themselves tend to produce further changes in demand in the same direction, and so on. Ultimately there is over-adjustment (like overheating a too cold room by switching on too much space heating) followed by a similar sequence in reverse (like switching off too much heating and cooling the room more rapidly than is desired).

Although fluctuations in inventory investment may not be large enough to cause major fluctuations in national output, they tend to intensify fluctuations arising from other causes.

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