Describe the role of business inventory change in determining the equilibrium level of GDP and changes in the level of GDP

Inventories work as buffers in the economy, absorbing changes in demand. A change in inventory levels indicates the relation between total spending and total production. Business managers usually have a desired level of inventories in mind and watch inventory levels carefully to determine whether orders and production should be changed. If inventories are rising in an undesired fashion, this means that sales are not keeping up with production and, therefore, production should be cut back. If inventories are falling, this means production is not keeping up with sales and, if sales are to continue, orders and production must be increased to keep pace with sales. Equilibrium output (GDP) will be that level of output where the level of desired inventories is being maintained with no unwanted increases or decreases.