Stocks and flows

The change in capital stock over the year is related to net investment: gross investment minus depreciation. If the year-end stock is greater than the opening stock, additions must have exceeded reductions, so net investment was positive, assuming no unusual revaluation or other adjustments. Hence option A may be correct.

Opening inventory is measured at the beginning of a period and closing inventory at its end; both are stocks. The change in inventory is calculated over the intervening period, so it is a flow. Thus, opening inventory–change in inventory–closing inventory forms the required stock-flow-stock sequence, making option C correct.

Fiscal deficit is the excess of government expenditure over government receipts during a financial year, so it is measured over a period and is a flow. Public debt is the accumulated amount owed by the government at a particular date, so it is measured at a point in time and is a stock. A flow such as fiscal deficit can add to the existing stock of public debt. Therefore, option D is correct.

The fiscal deficit is measured over the current year, so it is a flow. When it is financed through borrowing, it adds to the government’s outstanding public debt, which is a stock measured at a point in time. Thus, a flow can change the level of a stock, and option A is correct.

A profit and loss account summarizes revenue, expenses, and profit earned over an accounting period, so it presents flow information. A balance sheet reports assets, liabilities, and equity at a particular date, so it presents stock information. Consequently, option B is the correct distinction.

Depreciation measures the decrease in the value or productive capacity of a machine, building, or other capital asset over an accounting period. Since it records a change occurring during a period, depreciation is a flow. The total asset value on a date would instead be a stock, so option A is correct.

Total deposit liability on a particular date is the accumulated amount owed by the bank at that point in time, so it is a stock. New deposits received during a month are additions recorded over a period, so they are a flow. Hence, the correct order is stock and flow, represented by option D.

Household wealth is the accumulated value of assets, after considering liabilities, at a particular point in time. It is therefore a stock variable. Annual saving is the portion of household income not spent during a year; because it is measured over that period, it is a flow variable. Saving during successive periods can add to the stock of wealth, but saving itself remains a flow. Hence, option C is correct.

Saving is a flow because it is measured over a period, usually a month or year. When such saving flows accumulate over many years, they add to the stock of wealth measured at a particular date. This demonstrates that accumulated flows can create or increase a stock, making option B correct.

Income is earned over a period and is therefore a flow. Capital is the value of productive assets held at a particular point in time and is therefore a stock. Investment is expenditure on additions to capital during a period, so it is a flow. Hence, income–capital–investment gives the flow-stock-flow order.

Wealth is an accumulated value measured at a particular point in time, so it is a stock. Annual income is earned over a year, so it is a flow. A bank balance is the amount held on a specific date and is therefore a stock. Thus, wealth–annual income–bank balance is the only stock-flow-stock sequence, making option B correct.

Net investment equals gross investment minus depreciation. When net investment is negative, depreciation or retirement of existing capital exceeds new capital formation, so the economy’s capital stock decreases over the period, unless other adjustments offset it. Negative investment does not turn a stock into a flow or make it automatically zero.

A stock is a quantity existing at a particular instant, such as wealth or money supply on a stated date. A flow is measured over an interval, such as income, saving, or production during a year. Mathematically, a flow can also represent the change in a stock between two dates. Therefore option A gives the complete definition.

Foreign exchange reserves are an accumulated balance measured at a particular date, so they are a stock. Exports are sales of goods and services recorded during a month, quarter, or year, so they are a flow. The correct classification is therefore reserves as stock and exports as flow. The other combinations reverse or confuse the time dimensions.

Outstanding external debt on a particular date is a cumulative liability existing at that point in time, so it is a stock. Debt-service payments made during the year are recorded over a period and include payments such as interest or principal, so they are flows. Thus the correct order is stock followed by flow.

Saving is measured over a year, so it is a flow. When saving is used for investment in productive assets, it can add to the economy’s capital stock, which is measured at a point in time. The increase may be reduced by depreciation, but saving-investment activity still represents a flow affecting the stock.

A time period normally indicates a flow because the quantity is measured over an interval, such as investment during a year or withdrawals during a month. A stock is measured at a point in time, such as capital or a bank balance on a date. Options A, B, and C correctly describe flows changing related stocks; D reverses the time rule.

Money supply is the quantity of money available at a particular point in time, such as the balance measured on a reporting date, so it is a stock. Transactions are payments and exchanges occurring throughout a year, so their value is a flow. Repeated circulation of the same money does not make the money supply a yearly flow.

Money supply is normally a stock because it records the amount of money available at a particular point in time. The phrase “per year” usually describes a flow, such as annual income or production, so attaching it to money supply can create conceptual ambiguity. One must clarify whether a balance or a yearly change is intended.

An accumulated amount, such as capital or wealth existing on a particular date, is a stock. A rate stated per period, such as saving per month or income per year, describes an amount generated or measured over time and is treated as a flow. Therefore option C correctly distinguishes the level from the period activity.

The opening bank balance is a stock measured at the beginning of the year, and the closing balance is another stock measured at the end. Deposits and withdrawals occur during the year and are flows. Their net effect changes the opening stock into the closing stock, demonstrating a stock-flow-stock relationship rather than two unrelated balances.

Output is the quantity produced during a specified period, such as a day, month, or year, so it is a flow. Production capacity is the maximum productive ability available at a given point or over a specified installed base, so it is treated as a stock of productive potential. Thus C gives the intended classification.

Population is counted at a particular date, such as the census date, and therefore represents a stock. Net migration is the number of people entering minus those leaving during a period, so it is a flow. This flow can change the population stock, along with births and deaths. Hence A is correct.

Beginning and ending capital stocks are measured at two different points in time. Their difference represents a change occurring during the intervening period and is therefore linked to a flow, especially net investment after allowing for depreciation. The difference is not itself a fixed stock; it describes how the stock changed over time.

The first step is to identify what the variable actually measures. A balance or position existing at a particular date is a stock, while an addition, subtraction, earning, or activity occurring throughout a period is a flow. The size of the amount and the wording of the options do not determine the classification. Therefore, option A is correct.