The next chapters will be devoted to the simplifying assumptions, and by the time we finish with them, we will have a model that is at least realistic enough for a few practical applications. For now, let's rethink some of the mechanistic aspects of the model. Inventories will be a key to it. Inventories Inventories are stocks of goods held in businesses to bridge the gap between unpredictable sales and scheduled deliveries. For example, in a retail shoe store, the inventories would consist of pairs of shoes available to be sold.
Inventories are a kind of capital good.
That means, in turn, that an increase in inventories is an investment. A decrease in inventories is a negative investment. Negative investment just means we have less capital goods available at the end of the period than at the beginning. Investment in inventories is a small proportion of total investment, but it has a special leverage. Here is the reason.