The correct option is 1 only
Explanation
Inventory investment refers to the change in the stock of raw materials, semi-finished goods, and finished goods held by a firm over a specific period. In National Income Accounting, it is a component of Gross Capital Formation (Investment), calculated as the difference between the closing stock and the opening stock of the year.
Statement-wise Analysis
- Statement 1 is Correct: Inventory investment is explicitly treated as a part of capital formation. Gross Capital Formation consists of two parts: Gross Fixed Capital Formation (investment in fixed assets like machinery and buildings) and Change in Stocks (Inventory Investment). It represents the addition to the capital stock of the economy.
- Statement 2 is Incorrect: In National Income Accounting, investment is defined as the addition to the physical stock of capital. This includes both planned (voluntary) and unplanned (involuntary) accumulation of inventory. For instance, if a firm produces goods that remain unsold due to low demand, this unplanned accumulation is treated as the firm purchasing its own goods. It is recorded as inventory investment, not as a loss or exclusion from investment figures.
- Statement 3 is Incorrect: Inventory investment is calculated as Closing Stock minus Opening Stock. If the stock of goods at the end of the year is less than at the beginning (i.e., the firm sold more than it produced), the inventory investment is negative. This is often referred to as decumulation or disinvestment of inventories.
Key Takeaway
Inventory Investment is the net change in stock (Closing Stock - Opening Stock). It is a component of Gross Capital Formation, can be positive or negative, and includes both planned and unplanned inventory changes in GDP calculations.