Stocks

Stocks or inventories are materials and fuel, work-in-progress and finished goods held by companies.

The book value of stocks changes for two reasons.

	Stock appreciation is an increase in the money value of stocks owing to inflation. It adds to nominal income (the inventories can be sold at a profit) but there is no addition to real output.
	Stockbuilding (or destocking) is a change in the physical volume of inventories. It reflects the production of goods and affects nominal and real output.

Data are generally collected in value terms and deflated into volume terms using assumptions about accounting practices, stockholding patterns and price changes. The breakdown between the physical change and stock appreciation can be unreliable, especially during periods of rapid inflation.

In general the level of stocks rises as national income increases, but there are wide fluctuations which reflect the economic cycle. Stocks are a buffer between production and consumption. When demand increases unexpectedly, the first sign is a decrease in inventories before manufacturers can respond by increasing output. Alternatively, if an increase in demand is expected, stocks may be built up in advance ready to meet the extra demand. Either way, production can increase faster than demand for short periods during restocking or stockbuilding. Stocks accumulate when demand turns down unexpectedly; production might fall faster than sales as excess stocks are consumed.

It is not the total level of stocks but the change in the rate of stockbuilding which affects the GDP expenditure measure. An increase in stocks reflects extra output that has not been consumed. Note, however, that a fall in the level of stocks can lead to an increase in GDP if the rate of destocking slows.

The effects of changes in stocks are limited when measured over several years, but stockbuilding is highly volatile quarter-by-quarter. Accordingly, changes in the rate of stockbuilding can be a major influence on demand and GDP. The snag is that stockbuilding is the trickiest component of GDP to forecast. It is sometimes useful to look at the contribution stockbuilding makes to growth, rather than the change in stockbuilding per se. For example, we can say that GDP increased by 2.5% in 1990, of which the change in stockbuilding contributed 0.3%. On WorldData change in stockbuilding (series DSTK) is shown as a contribution to GDP growth.

Related topics:

	Gross Domestic Product
	Investment