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worth of goods and managed to sell Rs 800 worth of goods. Therefore, the Rs 200 is the difference between production and sales. This Rs 200 worth of goods is the change in inventories. This will add to the Rs 100 worth of inventories the firm started with. Hence the inventories at the end of the year is, Rs 100 + Rs 200 = Rs 300. Notice that change in inventories takes place over a period of time. Therefore it is a flow variable. Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment. There can be three major categories of investment. First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm. The second category of investment is the fixed business investment, which is defined as the addition to the machinery, factory buildings and equipment employed by the firms. The last category of investment is the residential investment, which refers to the addition of housing facilities. Changeininventoriesmaybeplannedorunplanned.Incaseofanunexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories. This can be illustrated with the help of the following example. Suppose a firm produces shirts. It starts the year with an inventory of 100 shirts. During the coming year it expects to sell 1,000 shirts. Hence, it produces 1,000 shirts, expecting to keep an inventory of 100 at the end of the year. However, during the year, the sales of shirts turn out to be unexpectedly low. The firm is able to sell only 600 shirts. This means that the firm is left with 400 unsold shirts. The firm ends the year with 400 + 100 = 500 shirts. The unexpected rise of inventories by 400 will be an example of unplanned accumulation of inventories. If, on the other hand, the sales had been more than 1,000 we 19 would have unplanned decumulation of inventories. For example, if the sales N had been 1,050, then not only the production of 1,000 shirts will be sold, a n the firm will have to sell 50 shirts out of the inventory. This 50 unexpected l reduction in inventories is an example of unexpected decumulation of c inventories. m What can be the examples of planned accumulation or decumulation of A c inventories? Suppose the firm wants to raise the inventories from 100 shirts u to 200 shirts during the year. Expecting sales of 1,000 shirts during the year i (as before), the firm produces 1000 + 100 = 1,100 shirts. If the sales are actually g 1,000 shirts, then the firm indeed ends up with a rise of inventories. The new stock of inventories is 200 shirts, which was indeed planned by the firm. This rise is an example of planned accumulation of inventories. On the other hand if the firm had wanted to reduce the inventories from 100 to 25 (say), then it would produce 1000 – 75 = 925 shirts. This is because it plans to sell 75 shirts out of the inventory of 100 shirts it started with (so that the inventory at the end of the year becomes 100 – 75 = 25 shirts, which the firm wants). If the sales indeed turn out to be 1000 as expected by the firm, the firm will be left with the planned, reduced inventory of 25 shirts. We shall have more to say on the distinction between unplanned and planned change in inventories in the chapters which follow. Reprint 2026-27