Question

A business firm produces a good this year that it doesn't sell. As a result, the good is added to the firm's inventory. How does this inventory good find its way into GDP?

Short answer

Goods that are produced but not sold within a year, and therefore added to a firm's inventory, still contribute to the GDP. This is due to GDP accounting for all goods produced, not just sold. Unsold goods contribute as 'increased inventory investment'.

Step-by-step solution

Understanding GDP

Gross Domestic Product, or GDP, is defined as the total value of all goods and services produced within a country in a given period, often a year. It represents the monetary value of all final goods and services produced.

Understanding Unsold Inventory Goods in GDP

Even if a good produced by a business remained unsold and added to the company's inventory, it is still considered part of the GDP. It's included because GDP measures production, not sales. Inventory investment which is a part of investment component of GDP includes changes in business inventories. An increase in inventory level is viewed as an investment.

How does This Add to GDP

So if a company produces a good, but does not sell it, and instead keeps it in its inventory, this good is still a part of GDP as 'increased inventory investment'. This is because it represents a good that was produced within the given year, which is what GDP measures.