Stock & Flow Concept

Stock and Flow Concept

In economics we should have very clear idea about the stock and the flow concept. There are a number of differences between them. Over micro economics elements( like demand, supply, capital gain, total wealth) and macro economics elements( like national income, total consumption, total investment, total money supply, total capital stock GDP), flow and stock concept play a vital role.

Stock and flow concept mainly measured on the basis of particular time period. On this particular time period some elements are flow and some are stock, although both the flow and stock concept are variable in nature. That is, it’s changing over the time period. In long run all the elements are flow.

Flow variable concept

Flow variable concept mainly measured on the basis of particular time references. It may be one day, One week, one month or one year. It mainly measures the flow of income or changes of income or other elements of a particular time references. So time is very important for flow concept.

Suppose we consider the income of an individual, to define it properly we must be consider the time period of the income. If we say that the income of an individual is $200 then it is meaningless. It does not clear whether the Individual earned $200 in a month or in a year. But if we specifically say that the person earned $200 in a year then it should be meaningful. Likewise national income is also a flow concept because we measure it as per year basis. Other flow variables are investment, rent profit, saving, expenditure, interest, supply, demand etc.

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Stock variable concept

Stock variable is measured without the time dimension. Stock variable is measured on a particular point of time. Suppose total wealth of a nation is fixed on a point of time, so it is a stock concept. Likewise, total money supply, total capital stock, total bank deposits all are stock concepts. These all elements all are still at particular point of time.

Here one question arises on our mind is GDP is a flow concept or stock concept? GDP that is gross domestic product (total monetary or market product finished goods or services produced within the geographical boundary of a country in a specific time period.) is obviously a flow concept because it is measured within one year of time period.

Suppose at particular point of time the total wealth of an individual is K0 and at the end of the year when he /she calculate his/her wealth is K1 .So here wealth is fixed at the particular point of time at the starting of the year and at the end of the year. Now if he /she calculate how much wealth increased during these period of time, then he/she get it is K1-K0. This K1-K0 is the flow of income which increased his/ her wealth. So income is a flow concept.

We may have taken the next example, suppose there is a tank of water, which is half filled, so the water which stored in this tank is stock concept because it is fixed on a particular point of time. Suppose one bucket water more added in this tank, the water of this tank increased and now fixed on another level. Here bucket of water is a flow concept.