Over the past decade new computer technology has enabled fir

Over the past decade, new computer technology has enabled firms to reduce substantially the amount of inventories they hold for each dollar of sales. Illustrate the effect of this change on the market for loan able funds. (Hint: Expenditure on inventories is a type of investment.) What do you think has been the effect on investment in factories and equipment?

Solution

The new computer technology has enabled firms to reduce substantially the amount of inventories they hold for each dollar of sales.

Over the past ten years, new computer technology has enabled firms to reduce substantially the amount of inventories they hold for each dollar of sales which has drastically affected the market for loanable funds. Ceteris paribus, assuming that the savings has been roughly the same, there has been a decreased expenditure on inventories in the form of investment

Inventory investment is a component of gross domestic product (GDP). What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they were produced. Conversely, some of the goods sold in a given year might have been produced in an earlier year. The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment. The term can be applied to the economy as a whole or to an individual firm.

Definition of inventory investment

Thus, if production per unit time exceeds sales per unit time, then inventory investment per unit time is positive; as a result, at the end of that period of time the stock of inventories on hand will be greater than it was at the beginning. The reverse is true if production is less than sales.

Due to new computer technology, the investment in factories and equipments has reduced. More focus has been given to IT & ITES industry for development and growth of the country.