Q. Consider the following statements:

1. A change in the inventory of a firm is treated as investment.
2. Under fixed business investment, the inventories of a firm essentially go up.

Which of the above is / are correct?
Answer: Only 1
Notes: Only the first statement is correct. Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment. The second statement, however, is not correct. Fixed business investment is defined as the addition to the machinery, factory buildings and equipment employed by the firms. Thus, under this type of investment it is not essential that the inventories of a firm would go up.