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The attractive aspect of using an accelerator-type of theory to explain investment is that there are sizable swings in inventories that follow business fluctuations. In recessions production drops more than sales as businesses reduce inventories, and during booms production rises by more than sales as businesses increase inventories. In fact there were some U.S. recessions during the years 1946 to 1960 in which much of the reduction in output was due to changes in inventories. The second table shows quarterly GNP and final sales for the years 1953 and 1954. Notice that from the second quarter of 1953 until the second quarter of 1954 GNP drops by $7 billion. However, final sales continue to rise until the fourth quarter of 1953, and drop only by $2.6 billion from then until the second quarter of 1954.
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Source of Data: National Income and Product Accounts of the United States, 1929-1974, (U.S. Department of Commerce), p ll. (Data are in billions of dollars.) |
Final sales differ from GNP because of inventory changes. If final sales exceed GNP, businesses are reducing inventories, and if final sales are less than GNP, businesses are increasing inventories. In the 1953-54 period, businesses switched from inventory accumulation to inventory liquidation, and this change, more than any change in buyer demand, explains the drop in GNP.
Patterns of inventory movement such as those illustrated in this table do not prove that an accelerator-like principle is involved; there are other possible reasons inventories may move in such a pattern. But the accelerator principle, applied both to fixed investment and inventories, is one aspect of business-cycle theory that is still alive today.