Correct Option
The correct option is 2 and 3 only.
Explanation
Inventory investment refers to the net change in the stock of raw materials, semi-finished goods, and finished goods held by firms over a specific period. It is mathematically expressed as the difference between closing stock and opening stock. Negative inventory investment, also known as inventory decumulation, occurs when the stock held at the end of the period is less than the stock held at the beginning.
Statement-wise Analysis
- Statement 1 is Incorrect: A rise in the stock of finished goods signifies inventory accumulation. This results in a positive value for inventory investment, as the closing stock exceeds the opening stock.
- Statement 2 is Correct: When aggregate demand in the economy exceeds current production, firms utilize their existing buffer stocks to meet the excess demand. This depletion of accumulated stock leads to a reduction in inventory levels, resulting in negative inventory investment.
- Statement 3 is Correct: Firms typically align production with planned sales. If actual sales exceed planned sales (an unexpected rise in demand), the firm sells more than it produced during that period. To fulfill these orders, the firm must draw down its existing inventory, causing negative inventory investment.
Key Takeaway: Negative inventory investment acts as a balancing mechanism when Aggregate Demand exceeds Aggregate Supply (current output), indicating that the economy is consuming goods produced in previous periods.