Unplanned change in inventories

Indian Economy glossary

Also called: Unintended inventory accumulation, unplanned decumulation · Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 12, Ch 2 "National Income Accounting"; Class 12, Ch 4 "Determination of Income and Employment"

Meaning

An unplanned change in inventories is a change in a firm's stock of unsold goods that the firm did not intend. It happens when actual sales differ from expected sales. If sales are lower than expected, unsold goods pile up. This is unplanned accumulation, and it signals that demand fell short of output. If sales are higher than expected, the extra goods come out of stock. This is unplanned decumulation. In the national income identity, investment includes both planned and unplanned investment.

Example

A shirt firm starts with 100 shirts, expects to sell 1,000 and produces 1,000. It sells only 600, so 400 shirts are unplanned accumulation, and it ends the year with 500. If it had sold 1,050 instead, the extra 50 shirts would have come out of stock. That would be unplanned decumulation.

Don't confuse with

  • Planned change in inventories: this change is intended. For example, the firm deliberately produces 1,100 shirts to raise its stock from 100 to 200.

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