In reporting on real GDP growth in the second quarter of 2016, an article on Reuters news noted that “U.S. economic growth unexpectedly remained tepid in the second quarter as inventories fell” and also that the “inventory drawdown was almost across the board.”
a. If companies are drawing down inventories, is aggregate expenditure likely to have been larger or smaller than GDP?
b. The chief economist at UniCredit Research was quoted in the article as stating, “The U.S. economy just went through a meaningful inventory correction cycle.” What would an “inventory correction cycle” be, and why would companies need to go through one?
c. The article stated, “Though the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output in the coming quarters.” Why would an inventory drawdown boost output in the coming quarters?