Stock and Flow Concept

Written By Fathimath Sama on Saturday, 22 June 2013 | 23:41

Stock refers to a quantity of a commodity accumulated at a point of time. The quantity of the current production of a commodity which moves from a factory to the market is called flow. 

The aggregates of macroeconomics are of two kinds some are stocks, typically the stock of capital ’k’ which is a timeless concept. A stock is always specified to a particular moment. Other aggregates are a flow concept, such as income, output, consumption and investment. A flow variable has the time dimension, it specified per unit of time. 

Stock is the quantity of an economic variable relating to a point of time. For example, store of cloth in a shop at a point of time is a stock concept. Flow is the quantity of an economic variable relating to a period of time. The monthly income and expenditure of an individual, receipt of yearly interest rate on various deposits in a bank, sale of a commodity in a month are some examples of a flow concept.

The concepts of stock and flow are used in the analysis of both micro and macro economics. 

In Micro economics: 

In micro economics, the concept of stock and flow are related to the demand for and supply of goods. The market demand and supply of goods. The market demand and supply of goods at a point of time is expressed as stock. The stock demand curve of good slopes downward from left to right like an ordinary demand curve, which depends upon price. But the stock supply curve of a good is parallel to the y axis because the total quantity of stock of a good is constant at a point of time. 

On the other hand, the flow demand and supply curves are like the ordinary demand and supply curves which are influenced by current prices. 

But the price is neither a stock nor a flow variable because it does not need a time dimension. Nor is it a stock quantity. In fact, it is a ratio between the flow of cash and flow of goods. 

In Macro Economics: 

The concepts of stock and flow are used in more in macro economics or in the theory of income, output and employment. Money is a stock variable, whereas the spending the money is a flow variable. Wealth is stock, income is flow, saving by a person within a month is flow, while the total saving on a day is stock. The government debt is stock while the government deficit is a flow and its outstanding loan is a stock. 

Some macro variables like imports, exports, wages, income, tax payments, social security benefits and dividends are always flow concept. Such flows do not have direct stocks but they can affect other stocks indirectly, just as imports can affect the stock of capital goods. 

A Stock can change due to flow, but the size of flows can be determined itself by changes in stock. This can be explained by the relation between stock of capital and flow of investment. The stock of capital can only increase with the increase in the flow of investment, or by the difference between the flow of production of new capital goods and consumption of capital goods. On the other hand, the flow of investment itself depends upon the size of capital stock. But the stocks can affect flows only if the time period is so long that the desired change in stock can be brought about. Thus, flows cannot be influenced by changes in stock in the short run 

Lastly, both the concepts of stock and flow variables are very important in modern theories of income, output, employment, interest-rate, business cycles etc.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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