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.
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
Capital is a stock, not a flow.
Capital = things people make to help them make other things.
builds up ("accumulates") or
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
and therefore to our ability to provide a better material life for people
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:
a vote on company policy, including picking the board of directors
a right to a percentage of company earnings
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:
A share of stock (business/finance sense) gives you a share of ownership
of a company's capital stock (economics sense).
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.
It depreciates when we become ill or infirm.
Health can improve (accumulate) through any of a variety of investments.
Health care is one kind of investment in health.
A flow of health care services helps maintain health. It helps our stock of health to accumulate, or helps keep it from depreciating.
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:
Exercise -- really, spending for training or exercise equipment or for a gym membership -- is close to the arbitrary border
between what is or is not included in national health expenditures.
Our School of Public Health has an Exercise Science Department,
and your doctor may advise you to exercise, which can involve
purchases on your part, but exercise spending is not included in
official national health expenditure data, unless it is done in a health care
facility, such as a rehabilitation hospital.
Education (not just health education, but all education -- especially basic
Differences in educational spending across states in the U.S.
correlate more strongly
with differences in health indicators than differences in health care spending.
Higher income people live longer.
This chart is for males. "Year" is when the man was born. A man born in 1912 turned 65 in 1977. For men in the bottom half of the earnings distribution (lower line), life expectancy at age 65 rise only 1.1 years from 1977 to 2006. Keep that in mind when you hear the claim that we should raise the Social Security age because people are living longer. The people who most need Social Security are not living much longer. Chart from the Social Security Administration.
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
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:
The Gross Domestic Product is a flow measure. It measures the value of goods and services that
flow from U.S. producers in a year.
In the cost section, we will see that economists regard cost as a flow.
The capital stock required to start
an enterprise has to be expressed as a flow in order to calculate
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 ...
When you spend money, by writing a check or by using your debit card, that is a ...
If you have a job or a stipend, you get paid so much a month. That is a ...