Question
Briefly explain the following basic concepts related to NI:
Flow and Stock Concepts
Solution
Flows and Stocks
The distinction between a stock and a flow is very significant and we should clearly understand it since national income itself is a flow. The basis of distinction is measurability at a point of time or period of time. Be it noted that both stocks and flows are variables. A variable is a measurable quantity which varies (changes).
(a) Flow Variables. A flow is a quantity which is measured with reference to a period of time. Thus flows are defined with reference to a specific period (length of time), e.g., hours, days, weeks, months or years. It has time dimension. National income is a flow. It describes and measures flow of goods and services which become available to a country during a year. Similarly all other economic variables which have time dimension, i.e., whose magnitude can be measured over a period of time are called flow variables. For instance, income of a person is a flow which is earned during a week or a month or any other period. Likewise investment (i.e., addition to the stock of capital) is a flow as it pertains to a period of time. Other examples of flows are: expenditure, savings, depreciation, interest, exports, imports, change in inventories (not mere inventories), change in money supply, lending, borrowing, rent, profit, etc. because magnitude (size) of all these are measured over a period of time.
(b) Stock Variables. A stock is a quantity which is measurable at a particular point of time, e.g., 4 p.m., 1st January, Monday, 2007, etc. Capital is a stock variable. On a particular date (say, 1st April, 2007), a country owns and commands stock of machines, buildings, accessories, raw materials, etc. It is stock of capital. Like a balance sheet, a stock has a reference to a particular date on which it shows stock position. Clearly a stock has no time dimension (length of time) as against a flow which has time dimension. A flow shows change during a period of time whereas a stock indicates the quantity of a variable at a point of time. Thus wealth is a stock since its magnitude is measured at a point of time but income is a flow because it can be measured over a period of time. Examples of stocks are: wealth, foreign debts, loan, inventories (not change in inventories), opening stock, money supply (amount of money), population, etc.
The distinction between stocks and flows can be easily understood by comparing the actions of a still camera (which records position at a point of time) with that of video camera (which records position during a period of time).
The distinction between a stock and a flow is very significant and we should clearly understand it since national income itself is a flow. The basis of distinction is measurability at a point of time or period of time. Be it noted that both stocks and flows are variables. A variable is a measurable quantity which varies (changes).
(a) Flow Variables. A flow is a quantity which is measured with reference to a period of time. Thus flows are defined with reference to a specific period (length of time), e.g., hours, days, weeks, months or years. It has time dimension. National income is a flow. It describes and measures flow of goods and services which become available to a country during a year. Similarly all other economic variables which have time dimension, i.e., whose magnitude can be measured over a period of time are called flow variables. For instance, income of a person is a flow which is earned during a week or a month or any other period. Likewise investment (i.e., addition to the stock of capital) is a flow as it pertains to a period of time. Other examples of flows are: expenditure, savings, depreciation, interest, exports, imports, change in inventories (not mere inventories), change in money supply, lending, borrowing, rent, profit, etc. because magnitude (size) of all these are measured over a period of time.
(b) Stock Variables. A stock is a quantity which is measurable at a particular point of time, e.g., 4 p.m., 1st January, Monday, 2007, etc. Capital is a stock variable. On a particular date (say, 1st April, 2007), a country owns and commands stock of machines, buildings, accessories, raw materials, etc. It is stock of capital. Like a balance sheet, a stock has a reference to a particular date on which it shows stock position. Clearly a stock has no time dimension (length of time) as against a flow which has time dimension. A flow shows change during a period of time whereas a stock indicates the quantity of a variable at a point of time. Thus wealth is a stock since its magnitude is measured at a point of time but income is a flow because it can be measured over a period of time. Examples of stocks are: wealth, foreign debts, loan, inventories (not change in inventories), opening stock, money supply (amount of money), population, etc.
The distinction between stocks and flows can be easily understood by comparing the actions of a still camera (which records position at a point of time) with that of video camera (which records position during a period of time).
