Question

Why do macroeconomists care about unplanned inventories?

What is the consequence if firms amass large quantities of unplanned inventory at the beginning of a recession?

What about reductions in inventories? Is that always a good sign for the economy? Why not?

Answer 1

Positive unplanned inventories occur if the inventory you have is more than what you need while negative unplanned inventory occur if the inventory you need is less than what you need. If there is positive unplanned inventory, more money of producers is stuck in inventories which will reduce overall investment level. If there is negative unplanned inventory, there would be not be enough goods available if they get a sudden order from some party.

Amass large quantity of positive unplanned inventory will reduce circulation of money by producers and reduce overall investment which offer less work to labor. All of these factors combined will reduce aggregate demand and make recession more dense.

Reduction in inventories is not always good sign for economy. It could be result of excessive consumption by consumers which will surely result in exploitation of inputs used and put extra pressure on them. On the other hand, it is a good sign because reduction in inventories will raise consumption which will raise aggregate demand in the economy.