Question

Write down the relation between change in inventories and value added of a firm.

Answer 1

The relationship between a firm’s change in inventory and its gross value added is positive, where an increase in inventory directly boosts the total value added. This is represented by the formula GVA = Sales + Change in inventory − Value of intermediate goods, ensuring unsold, produced goods are accurately counted.

1. Positive Relationship: The formula implies that as the change in inventory increases, the value added by the firm also increases.
2. Accounting for Unsold Production: Value added measures the total production carried out by a firm, not just its total sales. Including the ‘change in inventory’ ensures that goods produced during the year but left unsold (carried forward to the next year) are successfully counted in the firm’s total economic contribution.
3. Deduction of Intermediate Costs: To find the actual value created by the firm, the value of raw materials used (Value of Intermediate Goods) is deducted from the sum of sales and inventory change.