In our economy inventories serve to bridge the gap between the production and sale of goods in much the same way that cash balances bridge the gap between the receipt and expenditure of income. Considerable time must elapse between the time that the output of a particular commodity is started and the time the commodity reaches the final consumer. In the meantime goods at various stages of completion exist in the form of inventories. These inventories fill what are often called the pipe-lines of our society.

The individual firm carries inventories for reasons of both necessity and convenience. A manufacturer...

Numerous writers on business cycle theory have discussed or commented on inventories though rarely systematically or at length. Despite the scattered nature of these comments there is evidence that some measure of agreement is beginning to develop on the nature and importance of inventory fluctuations. Nevertheless, there are still many unsettled issues.

There appears to be general agreement that inventories are an important factor in causing or accentuating the minor or forty-month cycle. Professor A. H. Hansen, for example, states that “not infrequently the minor setbacks experienced in the major upswings may be characterized as inventory recessions.”¹ Similarly, Professor M....

In order to analyse the part played by inventories in the business cycle it is convenient to develop a simplified model of the economic system which, as the analysis proceeds, is made more complex in an attempt to approach economic reality as closely as possible. The model is developed in terms of an enterprise system similar to that now prevailing in Canada and the United States. Changes in the level of income and employment in such an economy are primarily the result of the decisions of individuals, business firms, and governments. Individuals affect the flow of income and expenditure by...

The results obtained in the first model are partially modified when the assumption regarding the timing of the receipt and expenditure of income is changed. In Model 1 it was assumed that all income was paid out in the period in which it was earned and expenditures were made out of it in the same period. This is just the reverse of the assumption made in the Robertsonian form of period analysis where it is assumed that income earned in one period is not spent until the following period. It is now desirable to examine this assumption more carefully.

During...

A basic conclusion which emerged from the preceding analysis is that an accumulation or liquidation of inventories can only occur when the production of consumer goods is respectively above or below the level which is appropriate to the equilibrium level of income as previously defined. This is subject to qualification to the extent that lags in expenditure out of income are present. But this conclusion takes no account of possible variations which may occur within total inventories, for it is consistent with the above conclusion that an accumulation might occur in respect to one class of inventories, which was exactly...

A useful approach for analysing the relation of price changes to fluctuations in inventories is to classify commodities on the basis of the timing, the degree, and the frequency of their price changes over the business cycle. It has been well established that prices of raw materials come first in all three respects. They lead, fluctuate more widely, and change more frequently over the cycle than prices of finished or semi-finished goods.¹ But this is not equally true of all raw materials: a distinction can be made between those whose prices are determined under conditions of keen competition, often on...

Thus far it has been assumed that inventories were valued at retail prices. This has enabled a direct comparison of the production of consumer goods with consumers’ expenditures and has made possible the assumption that an increase in consumers’ spending would result in an equal decline in the value of inventories. This would be approximately true if the retailer’s markup were negligible, but this is not the case; the average markup by Canadian retail stores in 1941 was about 20 per cent.¹ In effect it has been assumed that retailers count their profits on any increase in their stocks at...

Thus far it has been assumed that investment in durable assets is made independently of the level of income and consumption, an assumption which requires further examination. In the current literature capital spending is often considered to be a function of one or more of the following: the rate of interest, the rate of change in consumers’ expenditures, the level of income, and the level of expected profits. While it is beyond the scope of this work to examine in any detail all the factors which determine the level of capital investment in our society, a brief survey of the...

Analysis of a model of the economic system has provided a specification of the conditions under which a planned accumulation or liquidation of inventories can be achieved. Though an individual firm, acting alone, can easily accumulate or liquidate inventories, all firms acting together face a different problem. An individual firm can neglect the extent to which its own sales are dependent on its own output. But when all firms acting together are considered, this interdependence between sales and output is of prime importance. In a simplified model of the economic system it was shown that no accumulation of inventories will...

This chapter contains an analysis of the behaviour of inventories in ten manufacturing industries over the period 1918 to 1950. The industries selected were the ten largest ranked according to total value of inventory held in 1938. In that year these ten industries held about 39 per cent of all manufacturing inventories. The principal data available consist of the value of inventory on hand at the factory as reported to the Census of Industry for the company’s fiscal year endings which in almost all industries was December 31. For the years 1931 to 1934 and 1941 to 1943 a breakdown...

Annual estimates of the volume and value of total business inventories in Canada are available for the period 1926 to 1950. A breakdown of this total by main industrial groups has been published for the value, but not for the volume, series.¹ However, the author has secured access to unpublished estimates of the latter, and has prepared annual estimates of both the value and volume of manufacturing, transportation, electric utility, and grain inventories for the period 1918 to 1925.² A measure of the relative importance of the inventories held by different industrial groups is given in Table 22.

Cyclical fluctuations...

This statistical study of the behaviour of inventories in the Canadian economy confirms some theoretical views about intentories and contradicts others. The present analysis of annual data gives some support to the view that the movement of inventories may play a causal role at cyclical turning points, yet a more decisive statement must await the accumulation of monthly data. On the other hand, Canadian data give only limited support to the view that investment in inventories is an important cause of the minor recession. Canadian experience also suggests that the effects of investment in inventories in reinforcing cyclical expansions and...