ONLINE CLASS - 1 - CONCEPT OF STOCK AND FLOW*

*DAY #01           27.03.2020*

*TOPIC – CONCEPT OF STOCK AND FLOW*

STOCK - A stock is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past.

FLOW - A flow variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

For example, India’s nominal gross domestic product refers to a total number of rupees spent over a time period, such as a year. Therefore, it is a flow variable, and has units of rupees/year.

In contrast, the India’s nominal capital stock is the total value, in rupees, of equipment, buildings, and other real productive assets in the Indian economy, and has units of rupees.

In Accounting - A stock refers to the value of an asset at a balance date (or point in time), while a flow refers to the total value of transactions (sales or purchases, incomes or expenditures) during an accounting period. If the flow value of an economic activity is divided by the average stock value during an accounting period, we obtain a measure of the number of turnovers (or rotations) of a stock in that accounting period. Some accounting entries are normally always represented as a flow (e.g. profit or income), while others may be represented both as a stock or as a flow (e.g. capital).

A person or country might have stocks of money, financial assets, liabilities, wealth, real means of production, capital, inventories, and human capital (or labor power).

Flow magnitudes include income, spending, saving, debt repayment, fixed investment, inventory investment, and labor utilization. These differ in their units of measurement.

DIFFERENCE BETWEEN STOCK AND FLOW

Stock	Flow
Stock relates to a point of time	Flow relates to a period of time.
Stock is not time dimensional.	Flow is time dimensional as per hour, per month, per year.
Stock influences the flow. Greater the glow of capital, greater is the flow of goods and services.	Flow influences the stock. For example: monthly increase in the supply of money leads to an increase in the quantity of money.
Example: Wealth, capital, etc.	Example: Income, capital formation.

Between net investment and capital, capital is a stock since it is measured over a point of time and net investment is a flow since it is measured over a specified period of time.

Some more examples -

Stock	Possible units of stock	Inflow(s)	Outflow(s)	Possible units of flow
bank balance	Yen	deposits interest	withdrawals	yen per month
inventory of lumber	board feet	incoming lumber	outgoing lumber	board feet per week
housing stock	Dollars	housing investment	housing depreciation	dollars per year
equity shareholdings	shares (of 'stock')	purchases of shares	sales of shares	shares per month

Other contexts

Stock	Possible units of stock	Inflow(s)	Outflow(s)	Possible units of flow
CO2 in atmosphere	tons	tons emitted	tons sequestered	tons per day
guests in a hotel	persons	guests arriving	guests leaving	persons per day
population	persons	births immigration	deaths emigration	persons per year
water in bathtub	liters	water pouring in	water draining out	liters per second
waste in disposal site	tons	dumping waste	decay of waste	tons per week
fuel tank	gallons	refueling	fuel consumption	gallons per month

QUESTIONS AND ANSWERS

Question – What do you mean by Stock variable?

Answer –

Question – What do you mean by Flow Variable?

Answer –

Question – Give the difference between Stock variable and flow variable with suitable examples.

Answer -

Question - Which of the following is a stock variable and which is a flow variable?  Give reason-

(1) Inventory

(2) Change in inventory

Answer – (1) Inventory is stock variable, because it is measured at a particular point of time, that is, at the beginning or end of the year. Inventory is are treated as capital and hence it is a stock variable.

(2) Change in inventory (closing inventory - opening inventory) is a flow variable because it takes place over a period of time. Change in the inventory are form is treated as investment, that is, addition to the stock of capital of a firm. So, it is a flow variable.

Fill in the blanks –

1. Capital goods (example- building or machine in a factory) or consumer durable (example - television sets, home computers etc.) once produced do not wear out or get consumed in a delineated time period. In fact, capital goods continue to service through different cycles of production. There can be addition to or deduction from these if a new machine is added or a machine falls in disuse and is not replaced.  These are called __*stock*_______. (Stock / Flow) Choose the correct option.

2. Change in stocks are ___*flow*________. (Stock or flow)          Choose the correct option.

3. Suppose a tank is being filled with water coming from a tap. The amount of water which is following into the tank from the tap per minute is a (i) ___*stock*_____ (stock concept / flow concept) but how much water is in the tank is a (ii) ___*flow*___ (stock concept / flow concept).     Choose the correct option.

4. The part of final goods that comprises of capital goods constitutes ___*Gross Investment*__ of an economy.        (fill in the blanks)

5. All the capital goods produced in a year do not constitutes net is addition to the capital stock already existing. true or false? give reason.

*TRUE* – Significant part of current output of capital goods goes in maintaining or replacing part of the existing capital stock suffers wear and tear needs maintainance and replacement.

6. A part of the capital goods produced this year goes for replacement or existing capital goods and is not an addition to the stock of capital goods already existing and its value need to be subtracted from gross investment for arriving at the measure of net investment. This deletion which is made from the value of good gross investment in order to accommodate regular wear and tear of the capital is called __*Depreciation / Consumption of fixed capital*__.           fill in the blank

7. Match the following –

Profit          - Flow                                                         (a) Stock Variable

Savings - Flow                                            (b) Flow Variable

Balance in a bank account - Stock

Gross Domestic Product - Flow

8. State giving reason whether the following statement is true or false

1. Capital formation is a flow concept. - *True*

2. Bread is always a consumer good. -  *False*

3. Savings are stock.  – *False*

4. Butter is only a final product. – *False*

5. National income of a country is a stock variable. – *False*

6. Capital goods are used up to produce other goods. – *False*

Online Class for XII

Video #01   

Day #01 - 27.03.2020

Concept of Stock and Flow

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