In a simplified economy with no government or foreign trade, if firms produce significantly more output than consumers and other firms plan to purchase, leading to a large, unplanned increase in inventories, the national accounts identity (Output ≡ Consumption + Planned Investment + Unplanned Inventory Investment) no longer holds true.
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Analysis of Economic Output and Spending
In a simplified economy with no government or foreign trade, suppose total output is $1000 billion. If planned consumption spending is $700 billion and planned investment spending is $200 billion, which of the following statements is necessarily true based on the national accounts identity?
In a simplified economy with no government or foreign trade, if firms produce significantly more output than consumers and other firms plan to purchase, leading to a large, unplanned increase in inventories, the national accounts identity (Output ≡ Consumption + Planned Investment + Unplanned Inventory Investment) no longer holds true.
The Definitional Nature of the National Accounts Identity