In reporting on real GDP growth in the second quarter
of 2016, an article on Reuters news noted that “U.S. economic growth unexpectedly remained tepid in the second
quarter as inventories fell” and also that the “inventory
drawdown was almost across the board.”
a. If companies are drawing down inventories, is aggregate expenditure likely to have been larger or smaller
than GDP?
b. The chief economist at UniCredit Research was quoted
in the article as stating, “The U.S. economy just went
through a meaningful inventory correction cycle.”
What would an “inventory correction cycle” be, and
why would companies need to go through one?
c. The article stated, “Though the inventory drawdown
weighed on GDP growth, that is likely to provide a
boost to output in the coming quarters.” Why would
an inventory drawdown boost output in the coming
quarters?
Source: Lucia Matikani, “Inventory Reduction Curbs U.S. Economic
Growth; Rebound Expected,” reuters.com, July 20, 2016.