On the paradox of efficiency improvement at the micro level and Productivity Slowdown at the macro level: The case of Efficient Inventory Control
Last decades show a Productivity Slowdown at the macro level, but at the micro level we have seen a huge attention for business economics and operations management and we now have a decade of booming stock markets. This paper tries to tackle that paradox by singling out the issue of Efficient Inventory Control. This seems to be the part of the business process that comes closest to the problem of the Productivity Slowdown. Namely, when inventories are reduced, then this normally means that part of demand is serviced from inventories, and this means lower production. Estimating stylized relationships for the US, we find that inventories in 1997 are 25% lower than they would have been otherwise, and the level of production is 0.56% lower at an annual basis. However, real GDP growth is not really affected, since the annual change in inventory is a very small percentage of GDP. Thus, business success stories that are based upon inventory reduction - which is regarded as efficiency improvement at the micro level - can be reconciled with stagnation at the macro economic level.
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