Inventory investment include only net income from

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Inventory Investment Include only net income from January 1 to December 31 of a given year.
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- 4 - Negative inventory Very significant since "I" is one sector of GDP, if inventories decline, this will be a drag on GDP, this is what happens during recessions. Inventory Investment 1960 – 1992 All the stock drops is associated with recession and the years of negative I. WHY DO WE HAVE INVESTMENTS EVEN IN BAD YEARS? 1) Old and obsolete factories, office buildings and machinery must be replaced (depreciation) 2) Most I has been planned years ahead and actual will be carried out on schedule regardless 3) Low interest rates during recessions The 3 reasons cited above were overwhelmed during the Great Depression. Why replace worn-out and absolute plant and equipment when your plant is half-idle? Why carry out long term I plans when your firm may not survive the next few weeks? And why bother to borrow at low interest rates when your expected rate of profit is negative? I in plant or equipment plummeted from $41.9 billion in 1929 to 11.7 billion in 1933. Among all the components of GDP, I remain the loose cannon, a destabilizing element that tends to push the economy to its highs and lows. I is the most volatile sector or component of our economy (GDP) fluctuation in GDP are largely fluctuations in investment. More often than not, recessions are touched off by declines in I and recoveries are bought about by rising I. Investment is really the thing that makes our economy go. When we have prosperity, investment is high and rising. And in recession, investment is low and falling. HOW DOES SAVINGS GET INVESTED? Save most of it ends up invested by large corp. or business borrowers Money Buy stocks Corporate bonds going directly to the corporation, use it to invest in plant, equipment. These money could use for advertising, build up inventory, wages & salaries, rent, insurance etc. but most go to plant Corporations also raise a substantial portion of their investment funds internally, through retained earnings and depreciation allowances.
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- 5 - Retained Earnings Portion of profits not paid out to the owners of the business Depreciation Allowance Tax – deductible funds set aside to replace worn out and obsolete pant and equipment FINANCIAL INVESTMENT AND "REAL" INVESTMENT Financial Investment Purchase of corporate stocks, bonds, a bank certificate of deposit, CD, or other financial security.
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