Impact of loan spent on inventory

Hi Mike. The answer to your question is no. Dividing your loan amount by .59 is not correct. What the point .59 means is that Sector 36 spends 59% on purchasing intermediate inputs. Based on the information that you shared and assuming that you have the correct Sector, what you need to do is enter the $1,000,000 into the sales field of the sector and run your results for an Industry Change. However, you may want to consider how the loan proceeds might be used and frame you analysis based on the usage of the funds and not rolling everything up into one activity/event. The more you know how those funds might be used, the better you will be able to model the full impacts of this activity. If you have additional information, please feel free to share it and we will be able to provide additional guidance on this issue. We hope this helps.

Thank you for the informative response! It is very useful to know that the sum of the coefficients in a spending pattern may not be used to calculate industry growth. As a follow up- Since I am modeling the impact of a loan that was used entirely for inventory, I'm now taking the approach of a two part model. The first part simply models the loan being spent on inventory, an industry spending pattern with the loan amount as the level. The second part, models what happens when the company sells the new inventory, I conservatively assume sales equal the loan amount (may be thought of as inventory sold with no margin). I model the second part as an industry change with the loan amount as the inputted sales. I am not yet considering interest or paying back the loan. Does this new approach seem reasonable? My plan is to attribute the effects of both models to the loan. Initially I was worried about double counting effects, however I do not think this is a concern because the effects are from two discreet events, the initial purchase of inventory (industry spending pattern) and the subsequent sale of that inventory and growth of the business the received the loan (industry change). For the purpose of this model I am in fact assuming the entire loan is used to purchase inventory. Thank you! Mike

Hi Mike, How exactly are you defining inventory? As we define inventory, inventory is production that is produced and thus accounted for in a previous year's production. So when a company sells inventory, there are not backward linkages in that year, because the backward linkages and the money spent on purchasing them were already taken from another year's profits and or production levels. Are you perhaps looking at investment in construction expenditures? Just quickly, so that this does not create a problem for you, Sector 36 in the current Model is airport runways and power plants, Sector 37 is new housing, not sure which of those Sectors you were referencing above. For looking at purchases of inventory and how those would affect the Industries making the purchases and their overall Output levels, you would actually need to know what type of inventory they were purchasing. Is a residential construction company buying more wood? Concrete? Each element will affect the company differently. Based on what you have described and our understanding of what you are saying, you should not necessarily have any issues of double-counting because we cannot be sure exactly what you are referencing because we aren't sure how you are defining inventory. Could you please describe what you mean when you use the term purchasing inventory and selling inventory (i.e. purchasing = buying the materials needed to make a home vs. selling inventory, home sales; or purchasing = buying a material good that is thus repurposed and sold; or purchasing = Capital Expenditures investment so that more materials can be made, selling = selling what is produced with the Capital Expenditures materials). Thank you for your time and hopefully we'll be able to provide a clearer answer, once we understand how you are using the term inventory. Thanks!

Thank you again for working though this with me. When I say buying inventory I am referring to all raw goods that company buys in order to produce their output. For instance, if a candy factory is using a loan to buy inventory, then the loan amount goes directly to buying sugar, flavorings, etc. (all of the money). For this I am using a industry spending pattern that is normalized. After the initial loan, the candy factory will sell all the candy it produced with that extra inventory. I then model the increased sales as an industry change. I've made a number of assumptions I am comfortable, for instance that all the loan money goes to inventory, and that the sales revenue from the increase inventory will be the loan amount in sales. Ex: the factory gets $1 mn loan, they spend $1 mn on sugar, flavoring, etc. and then they make $1 mn in sales from selling that candy they produced with the $1 mn. Thank you again for taking the time to think though this with me. Hopefully that is more clear now. Thank you! Mike

Hi Mike, We are glad to help out. Thank you so much for clarifying. What you are calling inventory, we typically refer to as an Industry Spending Pattern or as Intermediate Expenditures, which is why we needed the clarification, so we appreciate you taking the time to help us work this out. While you certainly can break down the problem this way, you will essentially be doing extra work and running a risk of double-counting that can be avoided simply by running an Industry Change Activity for the Sector that is receiving and spending the loan on its operational expenses. Thus we would recommend just doing an Industry Change analysis. When you impact a Sector through an Industry Change Activity, the Sector goes out and makes all the purchases of Intermediate Expenditures (inventory) that it needs to make to create the products it sells, it also pays Labor Income to that Sector's workers as well as all the workers in the various rounds of Intermediate Expenditures and Induced workers, so you will capture the entire impact of the loan for that company for the year with the Industry Change Activity. You can treat this as an annually reoccurring value, and consider it as being a complete estimation of your impacts. One note though that you have made though is that you know that you are not accounting for the Margin above the value of the inventory and labor costs that would allow for any potential profits of taxes paid by loan receiver when they make their sales. The Industry Change Activity will automatically remove these, so without any further adjustment, as you stated this would be a conservative estimate. One way you can account for this is to use the regional data for this Sector to 'inflate' your loan value to account for these two aspects of final sales to get a number that is adjusted to more closely meet the definition of Industry Sales. To do this you can choose your Industry Sector, go to the Explore> Social Accounts> Balance Sheet (Tab), and select View By: Industry Balance Sheet and the Value Added tab. (If you don't see the Explore menu go the File>User Preferences. Once you have opened the User Preferences window, you will want to choose the Analysis tab. On the Analysis tab you will select Advanced Modeling, if it is not already checked and then check the Accounts Explorer check box. This will activate the Explore menu in both your Standard and Tasks bars). In this tab you will see the percentages of total Output that are made up by Other Property Type Income (profits) and Taxes on Production & Imports (taxes). You can use these values to 'inflate' you loan value to reflect a final demand sales cost for your Industry Sales field in the Event. Just note that you made this adjustment and how you went about it in your report. Hopefully this helps, and we apologize if we have misunderstood what you were looking to resolve.