Inventory Change
The inventory components of crop and livestock output represent
the value of the change in inventories as opposed to the change
in the value of inventories. Under the concept of national income
accounting, income is a measure of the net value of production occurring
within the calendar year. Changes in the value of stocks produced
in prior years as a consequence of price changes are not appropriate
for inclusion as income. Thus, the quantity changes in inventories
are computed and then valued at calendar-year weighted average market
prices in order to avoid the inclusion of the effects of capital
gains and losses on stocks of farmer-owned commodities held in inventory.
What is the significance of the value of change in inventories?
-
The inclusion of the value of the change in farmer-owned commodity
inventories makes possible the calendar-year accounting for
production. A positive change connotes new production that occurred
within the year, remains in inventories at the end of the year,
and is destined for sale after the end of the year. The addition
of the increment to inventories credits the production to the
year of occurrence. In contrast, a negative change is the result
of a drawdown in beginning-year stocks and represents a sale
of commodities produced in prior years. The inclusion of a negative
inventory value serves to offset the effects of the sales of
these quantities in cash receipts within that year. The offset
is necessary to achieve calendar-year accounting because the
commodities were previously accounted for in an earlier year
as an addition to inventories.
Which farm income measures include the value of change in
inventories?
- Both value added and net farm income are value-of-production
measures, which require adjustment for change in inventory in
order to reflect current year's agricultural output. Net cash
income estimates are independent of when production took place
and, consequently, do not incorporate inventory change.
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