Stocks and flows

Human capital today represents the accumulated education, skills, training, health, and experience embodied in a person at a point in time, so it is a stock. Earnings this year are income received over a period, so they are a flow. Education flows can build the human-capital stock.

National wealth is the accumulated value of a country's assets minus liabilities measured on a particular date, so it is a stock. Gross domestic product measures the value of final goods and services produced within the country during a year, so it is a flow. This is why GDP is reported per period.

The most reliable rule is to examine the time reference. A stock is measured at a particular point of time, such as wealth or deposits on 31 March. A flow is measured over a period, such as income earned during a year, saving per month, or investment during a quarter. The nature of the item or its size does not decide the classification.

Change in inventories is calculated as closing stock minus opening stock. Here, the change is ₹3,40,000 − ₹4,10,000 = −₹70,000. The negative result means inventories decreased during the period: more goods were sold or used than were added to stock. In the expenditure method, this negative change in inventories is recorded as negative investment and reduces total investment expenditure by ₹70,000.

An increase in stock means that goods produced during the current year have not yet been sold. National accounting treats this unsold output as inventory investment, because it represents production made in the period. Including it prevents current GDP from excluding goods merely because their sale occurs later. Imports, transfer payments and NFIA are different concepts and are not the reason for this inclusion.

Goods produced during the accounting year are part of that year’s output even if firms have not sold them by year-end. Their value is recorded as inventory investment, which is a component of investment expenditure. This treatment ensures that GDP measures production rather than only completed sales. They are not transfer payments, NFIA, or automatically excluded.