Without knowing which variables reflect stock and which variables represent flows, economic progress cannot be adequately defined or understood. Flow variables make up the majority of macroeconomic variables provided by statistical organizations. The value of final goods generated by the economy in a given year is measured by Gross Domestic Product (GDP). GDP is a yearly flow of dollars, euros, or other currency units measured in dollars, euros, or other currency units. GDP is a flow of money into the economy’s inventory stock. Because the majority of GDP is either consumed by individuals or the government, invested in production by enterprises, or exported, the inventory stock is not significant. Outflows include consumer expenditure, government spending, and exports. The rest of the GDP is stored as additional inventory.
Government debt is an important stock that plays a significant influence in macroeconomics. It is built up by government budget deficits (the difference between budget spending and budget receipts) and lowered by debt repayment through budget surpluses (negative budget deficit). If the government continues to run a budget deficit for several years, it will amass a huge stock of government debt. Because interest must be paid on the debt stock, and interest payments are part of budget spending, it is more difficult to stop increasing debt once it has reached a substantial size. This illustrates how the stocks can influence the flows: the larger the debt stock, the higher the interest spending, which is a flow contributing to the debt stock.
Unemployment is another major example of stocks and flows in macroeconomics. A large proportion of people in the economy are unemployed at any given time. The amount of people that are unemployed is a stock. A number of persons lose their jobs and enter the ranks of the unemployed in each period, representing an inflow to unemployment, and a number of unemployed people find work and exit unemployment, representing an outflow from unemployment. Unemployment will rise if the pace at which workers lose their jobs (job separation rate) is higher than the rate at which the unemployed find work (job seeking rate), because the net inflow to unemployment will be positive. As a result, strategies aimed at lowering the unemployment rate must consider the effects of various measures on both the rate of job search and the rate of job separation. For example, if a policy makes it more difficult for businesses to terminate employees, the rate of job separation will decrease. However, such a strategy would make employers more hesitant to hire new employees, decreasing the rate of employment creation. The overall impact on unemployment of such a program is unknown.
Why is GDP considered a flow concept?
If you put $100 into your emergency fund account at the end of each month, you’ll have a balance of $1200 ($100*12) at the end of the year, even if you don’t have any emergency needs. The monthly deposits represent flows, while the year-end balance represents a stock that accumulates the flows. The monthly deposits can be classified as savings (as flows) and the year-end amount as saves (as stocks).
If the emergency fund is depleted, these costs will be deducted from the account. The difference between inflows and outflows should be reflected in the balance at the end of the year.
A positive balance (also known as a surplus) develops when inflows exceed outflows. A negative balance (also known as a deficit) occurs when outflows outweigh inflows. The negative balance becomes a debt if the shortfall is covered by borrowing. As a result, deficit flows increase the debt stock.
The federal government, for example, has a budget deficit every year because it spends more than it collects in taxes. These deficits are financed mostly through borrowing from abroad, and they add to the nation’s ever-increasing public debt. Because of these continuous accumulations, the total federal debt is expected to approach 100% of GDP in 2012, with yearly deficits averaging over 10% of GDP (Economist 11/21/2009; BW 2/15/2010).
The distinction between investment and productive capacity is another application of the concepts of flows vs stocks. Investment in new capital goods is a continuous process. Capital goods, on the other hand, accumulate as productive stocks because they persist longer than the flow period. The productive infrastructures, such as roads and bridges, houses and commercial buildings, and software and hardware, are among the accumulated stocks. Outflows are depreciation charges set aside to offset wear and tear, just as inflows are fresh investment. The physical infrastructure deteriorates if new investment falls short of the wear and tear. Many roads, bridges, and sewage systems are in in need of repair, yet many governments have failed to set aside necessary depreciation allowances.
Because inflows are not perishable right once, stocks and flows are linked. There would be no stocks if all flows were instantly perishable. As a result, the equities we see at any one time are leftovers from previous inflows at varying degrees of depreciation. GDP, for example, is a flow since it represents the total of all flows over the course of a year. Some of the flows that began in January may have died out by the end of the year. Physical objects that have not perished during the year are what we observe at the end of the year. As a result, GDP refers to the whole of what happens over the course of a year rather than what is left over at the end of the year.
Stocks are significant since they serve as the foundation for living and producing. Rich countries have vast stocks that have amassed throughout time. Low inflows and outflows help maintain stock levels. Large inflows and outflows, on the other hand, are required to maintain the stock’s vintage young, as inflows bring along more up-to-date technology and outflows remove outmoded technology. As a result, modern airports and faster trains may be found in rapidly rising China, while subway systems in industrialized countries with slower growth are outdated. Human populations with high birth rates and low death rates, on the other hand, are younger than communities of equivalent size with low birth rates and low death rates.
GDP, consumption, investment, saving, trade deficits and surpluses, budget deficits and surpluses, aggregate demand and supply are all examples of flows.
Debt, infrastructure, buildings, wardrobes, memories, library, circulating cash, computer software and hardware, databases, automobiles in garages, and antiques are all examples of stocks.
Is GDP a flow indicator?
The circular flow diagram can be used to depict GDP as a flow of revenue in one direction and spending on goods, services, and resources in the other.
In economics, what is a flow concept?
A flow idea is a quantity that is measured through time. For example, your monthly pocket allowance is 1500 rupees, on which the bank will pay you 4% yearly interest. Because they are measured over an hour, a month, and a year, this value is a flow concept.
A flow idea is which of the following?
Depreciation is a flow since it is calculated over a period of time. Because it is usually measured over a year, it is time dimensional. Was this response useful?
Why is capital a stock rather than a flow?
Capital is a stock because it is measured over a certain period of time, whereas net investment is a flow because it is measured over a specific period of time.
A flow variable is which of the following?
The term “flow variable” does not apply to national wealth. It’s a stock because it’s measured at a specific point in time. National wealth is not measured in terms of time. Unlike flow, it is not monitored over a set length of time.
Is income a variable of flow?
A flow variable is one that is monitored over a defined time period. A time-independent variable is referred to as a stock variable. A flow variable is something like income.
In economics, what is an example of flow?
A flow is a quantity that may be measured over a period of time. Flows are thus described in terms of a given time period, such as hours, days, weeks, months, or years. It has a time component. National income is a continuous stream. It explains and measures the flow of products and services into a country over the course of a year.
Flow variables refer to all other economic variables that have a time dimension, i.e., whose magnitude can be measured over a period of time. For example, a person’s income is a flow earned over a week, a month, or any other time period. Similarly, investment (i.e., adding to the stock of capital) is a flow in the sense that it occurs over time.
Expenditure, savings, depreciation, interest, exports, imports, change in inventories (not just stocks), change in money supply, lending, borrowing, rent, profit, and so on are all instances of flows since their magnitude (size) is measured over time.
(b) Stock Variables:
A stock is a quantity that can be measured at a specific moment, such as 4 p.m. on January 1, 2010, Monday, 2010, and so on. A stock variable is capital. A country owns and controls stock of equipment, buildings, accessories, raw resources, and other items on a specific day (for example, April 1, 2011). It is the capital stock. A stock, like a balance sheet, has a reference to a specific date on which it displays stock position. A stock, on the other hand, has no temporal dimension (length of time), whereas a flow does.