When computing GDP, we make an adjustment where we add any increase in inventories to the value of goods and

Question:- When computing GDP, we make an adjustment where we add any increase in inventories to the value of goods and services sold. Why do we make this inventory adjustment?

Answer

While calculating GDP an addendum is made by including any change in inventories within the total quantity of goods and services sold since inventories are part of the total output of the nation’s economy during the required period. If a company is involved in manufacturing goods but retailer does not sell them, they are then placed in the inventory stock. By taking the change in inventories into consideration, we are able to capture the fact that these products were manufactured during the current period, and are therefore a portion of the total production of the economy during that time. This adjustment ensures that the real value of all final output in the economy is borne within the domestic economy whether sold or stocked in inventories as recorded in the GDP.