What Does Stock and Flow Mean?
The difference between stock and flow is significant to understand as the concept of both stock and flow is mainly used while calculating the national income. A stock represents the quality of a variable at a point in time whereas the stock represents the change during the period of time. For example, wealth is a stock because it can be measured at a point of time whereas income is a flow. After all, it can be measured over a period of time.
By looking at the example given below, we can say stock represents the reserve of inventory or fund at a point of time whereas flow represents the inflow or outflow of any economic variable over a period of time. Read the article below to have a detailed understanding of stock and flow concepts and distinguish between stock and flow.
Stock and Flow Concepts Overview
Both stock and flow are the basis of systems dynamic modeling. Let us understand how exactly the stock and flow concept works? Stocks are entities that can either be accumulated or depleted, such as a bathtub that fills water in a tub using the faucet. The best examples of stock are inventory and an installed base. On the other hand, flows are entities that make either stock increase or decrease. For example, faucets or drains affect the level of water in the bathtub. Production (which increases inventory) and purchases made by consumers ( which increase installed base) are the best examples of flow.
The movement of a material characterizes the presence of flow. For example, the flow of raw materials, semi finished goods, finished goods, cash, and so on. A precise rule of thumb is that, as flow capture activities, all the items that are found on income and cash flow statements are flow because these items repressed financial activities during a specific period of time. In contrast, all of the items that are found on the balance sheet ( such as assets and liabilities) are stock as they represent the financial position at a point in time.
A common technique used to distinguish stock from the flow is to observe what changes take place in the system if the time were to stop. Stocks that are accumulated continue to exist. However, the flow would disappear as they are in action. For example, at any given point of time, the balance in your savings account, inventory, and people in the conference room are measurable because they are stock as these would continue to exist even if time were to stop. On other hand, the bank's interest payment, the manufacturing rate of units per hour, and the movement of people in and out of a conference hall could stop as they are dependent on time. These are examples of flow.
Examples of Stock and Flow
Following table represents the important points on the difference between stock and flow.
Differentiate Between Stock and Flow Tabular Representation
FAQs on Difference Between Stock and Flow Variables
1. What is Stock and Flow in Accounting?
Ans: In Accounting, a stock refers to the value of an asset at a balance date (or point in time) whereas flow refers to the total value of a transaction (such as sale or purchase, incomes or expenditure) during an accounting period.
2. Is Gross Domestic Product Stock or Flow?
Ans: Gross Domestic Product or GDP represents the value of final goods and services produced by the economy during a given year. It is a flow as it is measured during a period of time.
3. How to Measure the Number of Turnovers (or rotation) of Stock in Twelve Months?
Ans: The ratio of flow value of the economic activity to the average stock value during the accounting period obtains the measure of the number of turnovers (or rotation) of stock in twelve months.
4. Is Unemployment a Stock or Flow?
Ans: Unemployment is not a flow measure but a stock measure as it measures a total number, a proportion of the labor force at a given point of time. The rate of unemployment may remain the same but may not include the same individual. People may flow in or flow out.
