When goods are produced but not sold they go into stock. This addition to stock is added to Capital Formation. At the same time, goods taken from stock and sold are subtracted from Capital Formation. So the overall stock change is the change in the value of stock between the end of last year and the end of this year. However, if the value of stock has changed because of price changes, rather than because more goods have been added, then we do not add that to GDP since it is not produced but a ‘holding gain’. The Adjustment for Stock Appreciation then is that portion of the change in the value of stocks during each year attributable to price changes alone.
When we calculate GDP by the Income Approach, we use the gross operating surplus, which is calculated using the production cost and the sale price of goods. If goods have been sold from stock, and the price of the stock has gone up, then the gross operating surplus will have been increased, only due to price changes. For National Accounts, to remove this ‘holding gain’ addition to GDP, we subtract the element due to price change which is Adjustment for Stock Appreciation.
The price of goods also goes down sometimes, and it is necessary to adjust then for a ‘holding loss’.