Types of Variables (Stock vs Flow)

One of the various types of variables that we encounter in economics is the Stock and Flow variable. The main difference between these variables is the way they are measured with respect to time. Lets see how

Stock Variable:

 'Variable that is measured at a specific POINT IN TIME' it might be a specific Month, Date, or a specific minute. Simple daily life example would be

The money you have in your pocket.   Rs. 200 at 10 a.m. today

The Balance you have in your mobile phone. Rs. 50 yesterday

The amount of water in a Water tank.  150 litres right now

Here are some of examples from economics

Inventory, Wealth, National Debt.

Flow variable

'Variables measured as Per Unit of Time'. it might be per month, per second, per year or any unit of time you can imagine. However as opposed to stock variables it is necessary to mention units with flow variables. The next example may clarify the concept.

Suppose you ask your friend How much salary he earns? and he tells you he earns one rupee only. Is he lying? Unless he is jobless he is telling the truth. He is even telling the truth if he says 1 million rupees. Why?

Because he did not mentioned the time unit he might be earning 1 Rupee per second which is equivalent of Rs 43,200 per month. This shows how misleading and information can become if the right unit of time is not mentioned.

Some examples of Flow variables includes

An individuals monthly income. 40,000 rupees per month

The call rate Ufone or Telenor.    1.5 rupees per 30 seconds

Inflow or Outflow of water into/out of a water tank. 20 liters per minute

Economic examples would be

Gross Domestic Production, Investment, Inflation,

Stock variables are like still pictures while flow variables are like recorded videos.

Why is the distinction of Stock and Flow important?

We need to know if a variable is stock or flow because while constructing an economic model most of students make a mistake of equating stocks with flows. If right hand side of an equation is a stock variable, left hand side of the equation must be stock and same is true for flow variable. An economic identity that we normally face in textbooks is

Y = C + I + G + NX

The left hand side represents income which is a flow variable. the right hand side must be a flow or sum of flow variables. Consumption, Investment, Government expenditure and Net exports are all flow variables and measured or per unit of time basis.

But if we write and equation such as 

Y = W  or Income = Wealth   

This equation is completely wrong as we have equated a flow variable with a stock. There however is a way where we can equate stock and flows and that is by converting a stock variable into flow. For example

Y = ΔW  i.e Income equals Change in wealth.

How is it possible? suppose you have wealth of 1000 rupees at the beginning of a month. during that month you earn 100 rupees so that at the end of the month now you have 1100 rupees. it is clear that change in wealth which is 100 is due to this income of rupees 100. so stock and flow are not independent from each other. it is because of the flow variables that a stock variable increases or decreases.

one example that can be quoted in the above fashion is the relation of capital (K) and investment (I)

I =  ΔK  

Investment increases the existing level of capital. 

There however is a pitfall that one must be aware of. some variables are used both as stock and flow such as capital and labor. therefore, you might often use capital stock instead of simple capital to distinguish it from the flow variable and use labor force instead of simple labor.