An article in the Wall Street Journal states that a change in inventories \"drag

Question

An article in the Wall Street Journal states that a change in inventories "dragged down the overall growth in GDP by nearly a full percentage point" below what it otherwise would have been.

Source: Josh Mitchell, "U.S. GDP Growth Slowed on Tepid Consumer," Wall Street Journal, April 28, 2017.

For this result to occur, is it likely that inventories increased or decreased? Briefly explain.

A. Increased, because inventories represent goods that firms did not sell, indicating an addition to inventory investment.

B. Decreased, since inventories are part of a firm's investment, which is a component of GDP, inventories must have fallen.

C. Decreased, because firms did not earn profits on their inventories, which would drag down inventory investment.

D. This cannot be determined since there is no direct relationship between inventory changes and GDP growth.

Explanation / Answer

There would be fall in inventories which dragged down the overall growth in GDP, because inventories are part of firm's investment, which is a cimponeco if GDP. So, fall in inventories must fall GDP growth.

So, the correct answer is an option (c).

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