Macroeconomics usually deals with the behaviour of aggregates of economic variables. An economic variable is a magnitude whose value may changes. Important variables in macroeconomics are gross national product, national income, consumption expenditure, investment expenditure, total money supply, general price level and overall employment. Some of these variables are ‘stocks’ and some are ‘flows’.
1. Stock and flow
A stock variable is a quantity measures at a specific point of the time. For example, the money supply is a stock variable, a definite amount on a specific date.
It is a certain amount at a specified point of time. In stating stock variable, both the amount and time must be clearly specified.
In contrast, a flow variable is a quantity which can only be measured in terms of specific period of time. In studying flow variables, it is important to be specific about the time period in question. For example, it is meaningless to say that Mr. X’s income is $. 9,000 since it is not clear whether his income is $. 9,000 per month or per year. An income of $. 9,000 per month is quite different from an income of $. 9,000 per year. All the flow variables are thus rates (of flow) over some specified time period.
Thus, stock variables have a time reference with them, while flow variables have a time dimension.
2. Ratio Variable
In macroeconomic analysis, we also use ‘ratio’ variables. The variables in this category express the relationship between two flows, two stocks, or of stock-flows at a certain point of time.
The ratio between saving and income (S/Y) or ratio between consumption and income (C/Y) described as average propensity to save and average propensity to consume respectively is the flow ratio variables.
Liquidity is a ratio between two stocks, viz., liquid assets and total assets. Some variables like income-velocity of circulation of money may be expressed as a ratio of the flow of money transitions to the stock of money.