The field of economics is filled with interconnected items, sometimes called variables, which are examined both independently as well as taken as a whole. When one variable is set, it can mean that other things are set too. When one variable changes, it often means that other things change as well. These changes can be either significant or trivial depending on what variables are being measured. Variables, by their very nature, are both measurable and changeable.
Flow variables refer to variables that are measured over a period or per unit of time. Stock variables, on the other hand, mean those variables that are measured at a point in time.
The concepts of stock and flow are variables that have mutual dependence both to each other as well as to other variables.
Flow variables refer to variables that are measured over a period or per unit of time. The time can be whatever it is defined as in the system that is being measured. It could be hours, days, weeks, months or years.
Examples of flow variables include income, budget deficits, investment expenditure, sales revenue and gross profit. When thinking about these variables, these are things that change frequently and may have substantial rates of changes over time as well as large amounts of change over time. Income, both on the national level and on the individual level, is a flow variable. National income is earned as a flow over a year. The individual earns personal income over the course of the pay period, which may be a week, two weeks or a month.
Stock variables, on the other hand, mean those variables that are measured at a point in time. At any given time as we measure our system, we may take a snapshot, so to speak, of variables such as debt, wealth, employment, money supply and capital stock (such as factories, inventory and infrastructure).
Debt, or wealth, either on the national or personal level, may each be measured at any point in time, for example, at 10 a.m. on Monday, June 4, 2018. There’s no time dimension to this variable.
A flow variable can be thought of as being a video camera, which shows the viewer what is happening – how things change over time. A stock variable can be thought of as a photograph rather than a video. It shows exactly what the measure is at a given point in time and does not show any change.
The classification of economic variables into stock and flow variables is done for the sake of convenience. In reality, it is difficult to establish a clear borderline between these two variables. Depending on how the analysis is being made, some stock variables can be interpreted as flow variables and vice versa. For instance, national income in 2018 can be interpreted as a stock variable – as a measure at a point in time – for the year of reference even though it is a flow variable. Similarly, employment can be treated as a flow variable when it is viewed regarding work effort per staff hour. Also, money transforms from a stock variable to a flow variable when it is exchanged for goods and or services.
Stock and flow variables are mutually dependent. For instance, the quantities of savings people have are highly dependent on the frequency or the rate of flow of deposits into their savings accounts. Similarly, their stock of savings determines their flow of withdrawals – say, per month.