The terms stock and flow are concepts employed to describe a diverse group of variables used in a range of both theoretical and real-life settings.
In the finance and business world, for example, the notion of stock and flow have important and precise meanings, and are critical to defining and understanding a whole host of other economic principles.
What these words stand for, and the way in which they are implemented, can be complicated and perplexing. But because they are so vital to grasping the fundamental ideas within the business space, it’s crucially important to get to grips with them as soon as possible.
Below, we’ll outline the precise definition of stock and flow, and illuminate their meaning with some concrete examples.
What Is The Difference Between Flow and Stock?
In general, a stock variable is any kind of variable that describes some aspect of a system at a single moment in time. You can think of it as a snapshot measurement, taken at just one, given instant. Stock accumulates through “inflows”, and is depleted or eroded by “outflows”.
Flow variables, on the other hand, are variables that capture changes in a system over time. These variables, instead of being static snapshots, are more like video film – they describe the movement of things over days, months, years, rather than just giving the value of something at a certain, precise point.
Stock and flow variables never share the same units of measurement, and as such are said not to be commensurate with one another.
Stock Vs Flow Examples
Stocks are sometimes described as “level variables”, meaning that they change depending on the kind of inflows and outflows they are subjected to over time.
A stock variable that demonstrates this idea would be your own bank account. For example, the balance of your account can be described at any given point by a single variable. The value of this variable depends on the number and magnitude of deposits and withdrawals you have made into or out of it over the lifetime of the account. In this case, your deposits would be the “inflows”, and your withdrawals the “outflows”.
The units used to measure your bank account would be whatever denomination of currency your account was in – so, say, dollars for US citizens, or yen for Japanese.
You can also calculate the flow variable that affects your account balance too. The inflows and outflows of your bank account can be reconciled into a net inflow, which is just the difference between your inflows and your outflows over a period of time. The flow would then be the net inflow divided by the time period it was calculated over.
The units used for flow variables always have a time value in the denominator. This time value can vary depending on the period of time you use to calculate the variable. For things like your bank balance, the flow may be expressed as yen per month, or dollars per year.
Other examples of stock and flow can be found in contexts outside of the economic system. For instance, a nation’s population has people as its unit of stock, with its inflow determined by new births and immigration, and outflow by deaths and emigration. Possible units of flow in this case could be persons per year, or persons per decade.
Is GDP A Stock or Flow?
Gross domestic product – or GDP – is a measurement of the total market value of a country’s finished goods and services, usually taken over a period of one year. Therefore, because GDP is calculated in currency units per annum, it is classed as a flow variable.
On its own, GDP is actually an inflow variable for the stock investment of a nation. The stock inventory is not normally a large figure: GDP is quickly consumed either by individuals or government, invested into additional production by companies, or lost as export sales.
Is Savings a Flow or Stock?
Savings is a stock variable because it is a measurement of something that exists at just one particular point in time.
Alternatively, saving – without the “s” at the end – is a flow variable, since this is an action that occurs through time, and thus has a time component to it.
The concept of saving can be understood as a series of acts that either prevent income being spent, or which defer consumption until a later date. This can take many forms, such as reducing expenditures, depositing funds in a pension account, or simply leaving money untouched wherever it currently resides.
There are also some actions which don’t always appear to be a saving, but which in theory actually are. For example, money which is spent on making a mortgage repayment might not seem like a typical kind of saving, but in reality it is – it prevents immediate consumption of cash at the present time.
That said, the authorities that calculate the US GDP don’t consider personal interest payments as a saving, unless the entities that receive them put the money into a saving account themselves.
Is Investment Stock or Flow?
For most people, investing is something that takes place over a period of time, which would make it another kind of flow variable.
However, the term investment can sometimes be a used as a proxy to describe the current state, or magnitude, of a present stock of capital – which, in that case, would necessarily make it a stock variable instead.
Unlike saving and savings – which both have technical definitions – the use of the word investment can be a little fuzzy. In most uses of the term, however, it is typically given as a flow variable, because it is normally measured with a time dimension in its denominator.
Why Is Supply Classed As A Flow Concept?
Another tricky economic principle is the idea of “supply”. Supply describes the total amount of a commodity or service available to the market at a given time. Supply is tightly associated with demand, and is often referenced in relation to the price at which a good can be bought for.
When talking about supply, it’s again important to be clear about the thing we’re actually trying to describe. For instance, the money supply is sometimes classed as a stock because it is a snapshot of the total amount of money in circulation at a particular time. It is determined by inflows and outflows – such as all the money kept in savings accounts, cash held by depository institutions, and the assets in regular checking accounts.
However, people can sometimes use the phrase “money supply” as a synonym for money velocity, which is a concept related to money demand – and thus the money supply itself. Money velocity describes the rate at which a unit of currency gets used in a certain period of time, and is thus a flow concept rather a than a stock variable.
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