Stocks and Flows
When studying economics, one must be sure whether the variable being studied is a stock variable or a flow variable. Failure to do so can cause faulty economic reasoning. Stocks and flows are both variables that may increase or decrease with time. The crucial difference between the two is that one is measured at a specified point of time, whereas the other is measured for a specified period of time. For example, the total number of persons employed in India is a stock variable, whereas the number of persons who get new jobs is a flow variable. The balance sheet of a company is a stock statement, whereas the profit and loss account is a flow statement. From macroeconomics, money supply, consumer price index, unemployment level, foreign exchange reserves, etc. are examples of stock variables. GDP, inflation, exports, imports, consumption, investment, etc. are examples of flow variables.
Some flow macroeconomic variables have a direct counterpart stock macroeconomic variables. For example, investment and capital stock, and inflation and price index. Flow variables which do not have direct stock counterpart are exports, wages, taxes, etc. Though these variables may not have direct stock counterparts, they could indirectly affect other stocks.Although a stock can change only as a result of flows, the flows themselves may be determined in part by changes in stock. For example, a country's capital stock is determined by the level of investment. However, the flow of investment itself may depend partly on the size of the capital stock. In many theories of the business cycle, a critical factor explaining the business downturns is the decrease in the investment brought on by an excessive stock of capital resulting from an earlier, prolonged upsurge in investment.The purpose of this section is to familiarize the reader with a number of macroeconomic concepts that we will be dealing with throughout this book. We shall briefly explain here some of the many basic concepts which permeate through the macroeconomic theory.