Also, the report shows "adjusted" figures that take into account seasonality. It often cannot take into account figures in backflush costing scenarios, due to their nature. One of the more interesting data points that comes out of the business inventories report is the inventory-to-sales ratio, which is an indication of the relative size of inventories to the pace of sales.
For example, a ratio of 1. The trend line should be used in conjunction with a single static figure. If the ratio is rising, it could be an indication that the near-term production of goods will slow down as excess inventories are worked off. On the other hand, if the ratio is falling, it may be a harbinger of increased manufacturing activity in order to restock business inventories and meet demand.
Because it is an indicator of trends within the manufacturing sector, some say the ratio is an indicator of recessions. Financial Analysis. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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The Department of Agriculture collects statistics on farming. All of these bits and pieces of information arrive in different forms, at different time intervals. That is, quarterly GDP estimates what annual GDP would be if the trend over the three months continued for twelve months. As more information comes in, these estimates are updated and revised. In July, roughly updated estimates for the previous calendar year are released.
Then, once every five years, after the results of the latest detailed five-year business census have been processed, the BEA revises all of the past estimates of GDP according to the newest methods and data, going all the way back to You can even email your own questions! The Expenditure Approach divides GDP based on who is doing the spending: Consumption households , Investment businesses and households , Government Spending governments and Net Exports the rest of the world.
GDP can also be measured by examining what is produced , instead of what is demanded. Everything that is purchased must be produced first. Table 2 breaks down GDP a different way, based on the type of output produced: durable goods , nondurable goods , services , structures , and the change in inventories. Consumer Expenditure from the expenditure approach you read about above consists of spending on durable goods, nondurable goods, and services. The same thing is true of Government and Net Export Expenditures.
Investment Expenditures is a combination of durable goods like business equipment and structures e. Figure 3 provides a visual representation of the five categories used to measure GDP by type of product.
Note that whether you decompose GDP into expenditure components or by type of product the total is exactly the same. Services are the largest single component of GDP, representing over half. Figur e 4. Types of Product. In thinking about what is produced in the economy, many non-economists immediately focus on solid, long-lasting goods, like cars and computers.
Goods that last three or more years are called durable goods. Goods that last less than three years are called nondurable goods. By far the largest part of GDP, however, is services. Moreover, services have been a growing share of GDP over time. A detailed breakdown of the leading service industries would include healthcare, education, and legal and financial services. It has been decades since most of the U. Instead, the most common jobs in a modern economy involve a worker looking at pieces of paper or a computer screen; meeting with co-workers, customers, or suppliers; or making phone calls.
Even within the overall category of goods, Table 2 shows that long-lasting durable goods like cars and refrigerators are about the same share of the economy as short-lived nondurable goods like food and clothing. The category of structures includes everything from homes, to office buildings, shopping malls, and factories. The new structures that were built, or produced, during a time period are counted in this measure of GDP, which is another way of looking at investment, as it was discussed above in focusing on demand to measure GDP.
Inventories is a small category that refers to the goods that have been produced by one business but have not yet been sold to consumers, and are still sitting in warehouses and on shelves. So if a corporation chooses to build up its inventory by amount D Inv, it essentialy makes an expenditure that increases I by D Inv. Well, here is the logic. In my simplyfied world, total quantity produced is equal to total product sold and changes in inventory D Inv.
Said differently, Inventory will increase when a company produces more than what it sells; this is demonstrated in the table below. In the first three quarters, quantity produced equals quantity sold, so inventory remains constant at , and GDP grows as a result of consumer spending only, at approximately 4 percent.
In fourth quarter, revenue suddenly drops by 50 units, but quantity produced increases, as the expectation was that sales would continue its uptrend. This in turn creates a buildup of inventory of 60 units; however, GDP still grows at approximately 4 percent since corporations pick up the consumer spending slack by building up inventories.
In the fifth quarter, however, corporations switch gears and look to attenuate the inventory increase by decreasing production by 10 units, but sales continue to shrink faster by 25 units, so this builds up inventory by larger amount of 75 units. In the sixth quarter, corporations slam the brakes on production as inventories are getting out of control, laying people off.
Production declines by 25 units, but sales levels off, still well below production, so inventory continues to build at a decreasing rate of 50 units. The combination of flat consumer spending and a decrease in investment from 75 to 50 sinks GDP by approximately 10 percent, officially putting the economy in a recession two sequential quarters of negative GDP growth.
A similar situation occurs in the seventh quarter except that this time consumer spending spikes up while investments decrease to a point where they are both equal, resulting in no inventory buildup. At this time, the increase in consumer spending of 40 units is still not enough to offset the decrease in investment from 50 to 0, so GDP decreases at approximately 4 percent.
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