Updated August 18, 2013

Stocks and Flows

For our upcoming discussions of GDP and cost, we need a couple of building-block ideas: stocks and flows.

James Kwak gave a good explanation of stocks and flows, using a bathtub analogy:

In economics life there's a basic conceptual distinction between a flow and a stock. A flow is a something that occurs over some period of time, like water pouring from a faucet into a bathtub. A stock is something that exists at a specific moment of time, like the water in that bathtub. You measure a flow over a period of time (e.g., gallons per minute); you measure a stock at a specific moment in time (e.g., gallons). For a business, the income statement (revenues and costs in a year) measures flows, while the balance sheet (assets and liabilities) measures a stock. That's why the income statement is dated for a year (or a quarter) and the balance sheet is dated for a specific day. Everyone understands this. If you didn't, you would get confused between your salary and your bank account.

The full article is at http://baselinescenario.com/2011/10/11/bathtubs-for-beginners/.

Got it? Let's apply this to the GDP idea.


Goods and services flow around any economy. "Flow" means that goods and services move from one person to another. In a hunter-gatherer economy, the flow may be done according to custom. In a market economy, the flow may be determined by the buy-sell deals people make. In any society, people are always doing things for each other and giving things to each other. This is the flow of goods and services.


Stocks are also important to economic activity. Stocks do not flow. Rather, they build up or get depleted.

Capital is a stock, not a flow.


Accumulation of capital

The greater our stock of capital, the more goods and services can flow from our labor and natural resources.
The accumulation (build up) of our capital stock is central to economic growth.

Depreciation of capital

The capital stock stays with the producer as resources flow in and goods and services flow out.

But the stock can change as production goes on.

The capital stock depreciates if it wears out or becomes obsolete.

"Stock" -- business and economics usage

In business and finance, "stock" means an ownership right.

A share of stock in a company gives you:

In economics, the "capital stock" of a company is everything it has that helps it make things.

The relationship between the business and economics usage is that:

Health is a stock. Health care is a flow.

Health and health care provide an example of the use of stock and flow concepts.

Health is capital.

Health care is one kind of investment in health. For most of us, we can think of health as having a range from 100% healthy down to 0%, dead. This is the idea behind the quality-adjusted life years used in cost-benefit and cost-effectiveness analysis.

For actors, athletes, and models, appearance or performance is a capital stock that can be enhanced through investments in medical and other services.

Other investments in our stock of health include:

Public health


Education (not just health education, but all education -- especially basic literacy)


Injury and illness diminishes our stock of health

The notion of health as a stock of capital helps inform decisions in tort cases about how much a person should be paid to compensate for a loss of health caused by someone else.

Stocks and flows -- terms we will use

The distinction between stocks and flows will come in handy in the discussions we will be getting into next. For example:

Quick review quiz

(Not graded. Your answers are not sent to me.)

Your bank account -- pretend that you have one if you don't -- has some money in it. That is a ...
Stock Flow

When you spend money, by writing a check or by using your debit card, that is a ...
Stock Flow

If you have a job or a stipend, you get paid so much a month. That is a ...
Stock Flow

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