Monday, February 7, 2011

More on Inventories

For several years I have advocated the use of Final Sales of Domestic Product to measure money expenditures. This is as opposed to GDP. (Scott Sumner is always calling it NGDP, which is a bit redundant. RGDP is GDP corrected for changes in the price level.) The difference between the two measures is changes in inventories. Perhaps remembering early explanations of Keynesian economics, where unplanned inventory investment plays a key role in keeping expenditure equal to output, it was just those changes in inventories that I thought should not be included in a proper measure of monetary expenditure. Counting goods produced and not sold as having been purchased by the producer hardly counts.

While I still think that intuition is correct, it is based upon identifying inventories with stocks of unsold final goods. Cars are sitting on the lot or cans of beans are sitting on the shelf in the grocery store. What of other types of inventories? I am especially concerned with partially finished goods.

Perhaps keeping the focus on the future--the target should be for Final Sales for Domestic Product in a year, makes it so that every part of inventory changes can be ignored. However, more study is needed and I am more and more thinking that the best measure doesn't yet exist.


  1. "Counting goods produced and not sold as having been purchased by the producer hardly counts."

    Hutt would say that that goods produced and not sold by the producer are nevertheless being demanded by that producer, and therefore would qualify as "aggregate demand". What do you think about Hutt's point?

  2. Bill, It's not accurate to say I use NGDP as my measure of monetary expenditure; I use it as my measure of nominal output. My goal is to stabilize growth in nominal output, as a way of stabilizing employment.

  3. That appears more and more clear. I am thinking of your simplified macro models where employment is measured on the horizontal axis. Why is the goal " stablizing employment?"

    I think the fundamental goal of monetary policy should be to avoid an imbalance between the quantity of money and the demand to hold it. While changes in employment due to an excess demand or supply of money are bad, as are any resulting changes in output and the utilization of capital, changes in employment for other reasons are not necessarily bad. For example, if there is an increase in "stay at home momism," using monetary policy to offset this would be a bad idea. And even when the changes in employment are bad, I don't think generating monetary disequilibirum is generally the best way to deal with it. For example, correcting an increase in the nominal minimum wage by creating an excess supply of money seems to me to be a bad approach.

    My view is that slow steady growth of money expenditures on output is the least bad macroecnomic environment. It should avoid some undesirable fluctuations in employment, yes, but not others. And it might allow some desirable fluctuations in employment.

  4. Konig:

    I have read Hutt in a long time, but superficially, this is exactly what Keynesians say.

    From what I remember of Hutt, I would guess that his point would be that if firms don't cut prices to sell off the inventories, they must be planning to hold them. While that makes some sense, I think it is true that the process goes something like, unexected low sales, increased inventories, reduced production, diminished inventories, production again matching up with sales at a lower volume.

    That would be as opposed to increased inventories, continued production at the same rate, higher real volume of sales, perhaps at lower prices if necessary, reduced inventories.

    With Hutt, isn't the usual story that the problem is those blame unions? While I don't think labor unions are terribly helpful, I am convinced that the undesirable output consequences of changes in aggregate expenditure are not simply due to labor unions.

  5. Bill,

    What would you say to stabilising each side of the other money quantity equation MV=PT (rather than MV=PQ)?

  6. Bill, I should have said that my goal is to minimize suboptimal employment fluctuations, and that actual employment fluctuations are a reasonable proxy for suboptimal employment fluctuations.

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