What is an Inventory Investment?

Inventory investment is a measurement of the change in inventory levels in an economy from one time period to the next. Economists watch these levels closely, as they are often tied to the level of an economy's gross domestic product. If inventory levels go up from one point in time, inventory investment is classified as positive, and it is classified as negative if levels fall. This measurement is often a good indicator for the future direction of an economy, although it is not always accurate.

There are many measurements used by economists and other financial experts in an effort to determine the overall strength of a particular economy. They often focus on the consumption levels of consumers as one way to tell if the economy is headed in the right direction. The reaction of businesses, in terms of how much product they have in stock, can be equally as important. The ever-changing level of economy-wide inventory is also known as inventory investment, and its effect on the economy should not be understated.

How much inventory an economy has as its disposal in terms of raw numbers isn't a very useful measurement without any context to surround it. That is why economists focus on the change in inventory investment from one period to the next. Thus, the behavior of businesses toward their inventory in one time period can have a distinct impact on the way the economy as a whole behaves in future periods.

It is important to note exactly what goes into inventory measurement when trying to understand how it is connected to the economy. To measure them accurately, inventory levels should be measured only at the end of a time period, as sales will affect inventory levels during a specific period and skew the numbers. In addition, inventory investment is only relevant in terms of how it relates to current levels of production. That is why it is measured by how it changes from one period to the next, because past production of inventory isn't counted.

The level of inventory investment can often be an indicator of the overall performance of an economy. For example, during times of recession, the inventory levels often drop as a result of businesses tightening their belts and responding to reduced demand for products. Still, the inventory levels often drop even during periods when an economy surges, possibly as a result of businesses being slow to catch up to the increased demand. As this is the case, inventory measurements should be studied along with other factors for a complete economic picture.