Question

Consider the following information about production in quarter 1 of 2019. Firm T produces 600 tires at a cost of $27 each, and sells 580 tires to Firm B at a cost of $40 each. Firm B produces 290 bicycles at a total cost of $350 each, and sells 280 bicycles to consumers for $404 each. Enter whole numbers only with no commas and no dollar sign. In this simple economy, what is the value of inventory investment?

Answer 1

Firm T produces tires that are used by the Firm B in production of bicycles.

So, tires are intermediate goods.

Intermediate goods are not included in GDP.

However, stock of intermediate goods at the end of the year is taken as inventory investment component of GDP.

Firm T has stock of 20 tires at the end of the year. The cost price is $27 per tire.

The stock is valued at the cost price.

Calculate the value of stock at the end of Firm T -

Value = Stock at end * Cost price = 20 * $27 = $540

The value of stock at the end of Firm T is $540.

Firm B has stock of 10 bicycles at the end of the year. The cost price is $350 each.

Calculate the value of stock at the end of Firm B -

Value = Stock at end * Cost price = 10 * $350 = $3,500

The value of stock at the end of Firm B is $3,500.

Calculate the value of the inventory investment -

Inventory investment = Value of the stock at the end of Firm T + Value of the stock at the end of Firm B = $540 + $3,500 = $4,040

Thus,

The value of the inventory investment is $4,040.