INDEX

- WHAT IS STOCK AND FLOW?

- HISTORY
- THE CLASSICAL DEFINATIONS OF THE CONCEPT
OF STOCK AND FLOW
- GEORGESCU-ROEGEN ANALYSIS
- PRODUCTION PROCESS
- INPUTS, OUTPUTS, FLOWS, FUNDS AND
SERVICES
- A REDEFINATION OF THE CONCEPTS OF STOCK,
FUND, FLOWS AND SERVICES
- STOCK AND FLOW ANALYSIS
- DIFFERENCE BETWEEN STOCK AND FLOW
- USE OF STOCK AND FLOW
 In Microeconomics
 In Macroeconomics
- STOCK AND FLOW IN ACCOUNTING
- CONCLUSIONS
WHAT IS STOCK AND
FLOW ?
Economics, business, accounting, and related fields often distinguish between quantities that
are stocks and those that are flows. These differ in their units of measurement. A stock variable
is measured at one specific time, and represents a quantity existing at that point in time (say,
December 31, 2004), which may have accumulated in the past. A flow variable is measured over
an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is
roughly analogous to rate or speed in this sense.

For example, U.S. nominal gross domestic product refers to a total number of dollars spent over
a time period, such as a year. Therefore it is a flow variable, and has units of dollars/year. In
contrast, the U.S. nominal capital stock is the total value, in dollars, of equipment, buildings,
inventories, and other real assets in the U.S. economy, and has units of dollars. The diagram
provides an intuitive illustration of how the stock of capital currently available is increased by
the flow of new investment and depleted by the flow of depreciation.

HISTORY
Distinction between a stock and a flow is elementary, and dates back centuries in accounting
practice (distinction between an asset and income, for instance). In economics, the distinction
was formalized and terms were set in (Fisher 1896), in which Irving Fisher formalized capital (as
a stock).

Polish economist Michał Kalecki emphasized the centrality of the distinction of stocks and
flows, caustically calling economics "the science of confusing stocks with flows" in his critique of
the quantity theory of money (circa 1936, frequently quoted by Joan Robinson).

After recalling the classical definitions of stock and flow introduced by Fisher, the paper briefly
summarizes Georgescu-Roegen’s analysis of the production process and his definitions of the
concepts of stock and flow, and also of those of fund and services necessary in his approach.
The paper does then propose new definitions of the same four concepts and explore their
implications for a different and more realistic approach to labor market analysis.
The classical definitions of the concepts
of stock and flow
The definitions of the concepts of stock and flow generally adopted in economic literature, and
more specifically in labor market literature, have been criticized in a very convincing way by
Georgescu-Roegen, the author of some of the most relevant contributions to economic theory
published in the twentieth century. These criticisms, however, have not received much
attention and recognition. One of the first problems raised by western philosophy was the
problem of change. Heraclitus argued that “Everything is in flux and nothing is at rest”.
Therefore, things are not really things, they are processes. To Parmenides, the pupil of the
monotheist Xenophanes, the world of change was an illusion: the world was motionless. If we
have to believe our perception, life moves at the speed that time has on our planet and is
subject to a process of continuous transformation, creation and destruction. At the empirical
level we are faced by the problem of measuring both what is and what becomes. To measure
what is, it would be necessary to stop time, to measure what is becoming we need a time
interval. Since, we cannot stop time, the only possible way to measure the being is to use the
shortest interval possible, knowing that the shorter the interval the more precise the measure.
In the second case, the problem is that of choosing a time interval coherent with the
phenomenon we intend to measure. Starting from this general perspective, economic analysis
classifies variables into two groups: stock variables and flow variables. Fisher(1986), defined the
firsts as those variables that do not have a time dimension, and can therefore be measured in
an instant of time; the second as those variables that can be measured only in a given time
interval: “stocks relates to a point of time, flows to a stretch of time”. Later (Fisher, 1919),
however, he defined a flow (FL) as the change of a stock (S) measured in two different
moments of time (t-1) and t.

[1] (t−1) FLt= St−S(t−1)

Georgescu-Roegen Analysis
Georgescu-Roegen observed that this definition obliterates any antinomy between what flows
and what does not flow; in fact, it cannot distinguish the difference between what is contained
in a silos in two successive moments of time and the difference between the amounts of wheat
contained in two silos in the same moment. Fisher had tried to solve this problem opposing to
stocks, not flows, but the rate of flow. According to Georgescu-Roegen, this does not solve the
problem: it simply reduces the antinomy to a problem of different time dimensionality.
The real problem is that interpreting a flow as a change of a stock is reductive: many flows,
including those generated by production, are not the outcome of the de-accumulation of a
stock, but the outcome of creative processes: stocks are always the result of the accumulation
of flows, but flows are not always the result of a process of de-accumulation of stocks.
Therefore according to Georgescu-Roegen; “a flow is a stock spread out over a time interval”,
that is a flow is a stock with a time dimension.

PRODUCTION PROCESS
This discussion of the concepts of stock and flow represents the starting point of the analysis of
production. Since production is a process, it can be analyzed only in real time. In order to
describe a process it is therefore necessary to define its physical and temporal borders. The
choice of the borders -that allows distinguishing the process from the surrounding environment
and to define its duration-depends on the goal of the analysis. According to Geogescu-Roegen
the description of the production process employed by economic theory presents a series of
shortcomings and incoherencies related both to the representation of the process itself and to
the analytical categories employed.
Standard economic theory maintains that the production process can be indifferently described
by flow models and by stock models. In the first case, the process can be fully described by
flows, namely “by the rate of flow per unit of time of each of the n goods that are involved in
the process”. The description of the process consists therefore in accounting for everything
crossing the borders. In the second case, a process can be fully described by the quantities
existing at the beginning and at the end of the process. Neither of these representations is
complete: if both provided a complete representation of the process, the antinomy between
Stocks and Flows would be apparent. In order to provide a correct and complete representation
of the production process it is necessary:
•To list all the factors involved;
•To describe all the phases of the process;
•To insert the different phases in the time frame of the process.

Inputs, outputs, flows,funds and

services
Once the physical borders and the duration of the process have been defined, it is possible to
distinguish the inputs (everything which crosses the border from the outside) and the outputs
(everything which crosses the border from the inside). We can then classify the elements that
are involved in the production process in three groups:
1. Elements that are only inputs or only outputs;
2. Elements that are both inputs and outputs
3. Elements that are both inputs and outputs, but that during the production process are
subject to qualitative changes, in the sense that they progressively deteriorate.

Solar energy and waste material are examples of the first type of elements, wheat in the
production of wheat of the second, workers and utensils of the third.
From another perspective, the elements that enter in the production process can be classified
in flows and funds. The firsts are elements that are destroyed during the production process;
the seconds are elements that are used, but not consumed. Funds (land, capital, labor force)
produce services, without being consumed and being subject only to qualitative changes.
On the basis of this analysis, Georgescu-Roegen reaches the conclusion that funds (a machine, a
man) are not stocks. In fact, while stocks are the result of an accumulation process of its
elementary units and can be instantaneously de-accumulated, a fund cannot be obtained
through an accumulation process of the services that it will deliver and its de-accumulation
takes time. Moreover, if a flow is a stock spread over time, the concept of flow cannot be used
to indicate the services provided by a fund. The expression “the flow of services” is therefore to
be avoided. In this way we will not make the mistake to maintain that services can be
incorporated into the final products we do with raw materials. Finally, services and funds have
different dimensions. The quantity of a flow is measured in the appropriate measurement unit;
the rate of flow is the quantity per unit of time. The quantity of services demanded is given by
the number of units of the fund per unit of time (100 men per 100 days; 100 machines per one
week). Since the rate of services is equal to the fund divided by the time, it will be equal to the
number of units of the fund.

A redefinition of the concepts of stock,

fund, flows and services
The analysis of the concepts of fund and flows developed by Georgescu-Roegen presents a
series of problems.
Flows are generated by a creative process or can be the outcome of the de-accumulation of an
existing stock. A flow of cars can be the outcome of a production process of an automotive
factory, but can also be generated by the exits from a parking lot.
Stocks can be generated only by progressive accumulation of flows or better they are the net
result of processes of accumulation and de-accumulation that is of entry flows that, in their
turn, can be the result of the de-accumulation of other stocks, but originally are always the
result of a “creative” process, and of exit flows. The stock of cars present in a parking lot in a
given moment is the result of entries and exits that have taken place since the moment the
parking lot has been opened.
In conclusion, flow variables represent the original variables, while stock variables are the
results of flows. From this perspective it would appear more correct to define a stock as a
function of flows, than to think of a flow as a stock with a time dimension. Therefore a stock at
time t(St) can be thought as the sum of previous entries and exits flows(FLe and FLx):
[2] Si = ∑−∞( FLe−FLx)t
An implication of equation [2] is that a flow cannot be the difference between a stock
measured in two different moments of time, a part from the special case of a stock interested
only by entry flows or exit flows. In general:
[3]St– St-1= ∑t-1(Fle – Flu) t
Let us now consider the funds, i.e. those elements that:
•Are both inputs and outputs;
•Are used, but not consumed;
•Have the capacity to generate services that transform inputs into outputs.
A man or a machine, are not stocks since they cannot be de-accumulated instantaneously or
reconstructed from the services they provide and they are both the result of a creative process.
This is not true for the set of men and machines that a firm uses in its production process. If we
consider not only the ways in which men and machines enter into and contribute to the
production process, but also the ways in which companies build the fund of men and machines,
it is evident that men and capital are stocks since they are the historical outcome of processes
of accumulation and de-accumulation.
If we did not take into account this point we would miss one of the main implications of
Georgescu-Roegen analysis of the production process: to have shown that there is no analytical
difference between men and machines in the production process. This, not only because they
both produce the services required to transform inputs into outputs-a fact that is accepted also
by the neoclassical production function- but because the production of these services requires
not only the presence of a fund of machines, but also of a fund of men.
The analytical distinction between a factor of production and the services it produces has
always been clear and explicit for machines. In the production function the amount of output is
correctly a function of capital services, while investment theory deals with the problem of how
a company should operate in order to have the right amount of capital stock, and to innovate
its technology.
On the contrary, this analytical distinction has received very little attention in relation to labor.
The main reason being that neoclassical theory has always considered labor as a variable
factor,i.e. a factor whose quantity can be changed instantaneously and with no cost, according
to the changes in the level of production. As a consequence, production theory relates output
to labor services. The dependent variable of the derived demand for labor is represented by
labor services and neoclassical theory has never developed a theory of the fund of labor in
parallel to capital theory. This does also create a logical inconsistency between theoretical and
empirical analysis of the labor market, the first being expressed in terms of labor services, while
the second deals with people. Finally, this explains the theoretical difficulties of introducing
flow analysis in the main body of labor market theory.
It must also be underlined that considering labor as a variable factor has the logical implication
that firms can adapt the level and the structure of labor servicesto the level of production in
any given moment of time. In other terms, firms can choose “every day” the amount and the
typology of labor they need. Therefore, the level and the structure of employment are the
result of a continuous process of choice. This logical construct has important implications both
at the theoretical and empirical level. At the theoretical level it explains while mainstream labor
market theory has never tackled the problem of how companies deal with the issue of labor
turnover and plan their employment level and structure. At the empirical level it explains while
labor market surveys are mainly concerned with stock data, flow data playing a marginal role
and little attention being paid to their quality and their coherence with stock data.
In reality, the level and the structure of employment are the results of marginal adaptations
while bigger firms have long-term employment plan pursued by carefully monitored turnover
policies.
In summary: the assumptions that labor is a variable factor conceals the fact that the
construction of a given stock of workers is one of the more important goals of a firm - as much
as the process of investing in machines -and that firms act continuously in order to bring the
existing stock of labor to the desired level and structure.

Stock–Flow Analysis
The purpose of stock-flow analysis is to describe the formation of economic plans and the
determination of market prices in an economy where one or more commodities (e.g., wheat,
bonds, money) are traded simultaneously on both capital and current account. Traditional
demand and supply analysis is not entirely silent on this subject, but it is uncomfortably vague.
Walras and later general equilibrium theorists focused attention on the existence and stability
of a set of market-clearing prices in pure stock and pure flow models, i.e., models in which no
means exist whereby individuals can convert current income into present wealth, or present
wealth into future expenditure. In a pure stock economy, assets can be exchanged only for
other assets; in a pure flow economy, income can only be consumed. Explicit analysis of saving,
investment, and growth processes is conceptually possible only in the context of a stock flow
model.

Marshall and later partial equilibrium theorists did more justice to the special characteristics of
a stock-flow economy. The familiar trichotomy of market equilibria into temporary, short-run,
and long-run periods was conceived specifically to deal with transitory saving and investment
processes. But this analytical schema was applied systematically only to business transactors.
Thus, changes in long-run supply induced by business decisions to vary physical plant were
investigated in detail, while changes in long-run demand induced by analogous saving decisions
of households were largely ignored. In the end, therefore, Marshall and his followers
contributed little more than did Walras and the neo-Walrasians toward the development of a
coherent theory of price-quantity behavior in a stock-flow economy.

The existence of this gap in traditional value theory was gradually forced upon the attention of
economists by the prolonged debate about the foundations of economic analysis which
followed the publication of Keynes's General Theory in 1936. Even so, more than 15 years
elapsed before the appearance, in 1954, of an explicit model of price determination in a stock-
flow economy (see Glower 1954; Glower & Bushaw 1954). Subsequent contributions to stock-
flow analysis (particularly Archibald & Lipsey 1958; Chase 1963; Hadar 1965; Smith 1961) have
extended its boundaries to include, as special cases, both the general equilibrium theory of
money and established microeconomic analysis. Most of this material lies outside the scope of
the present discussion. The exposition that follows is intended to provide not a survey of, but
an introduction to, the literature of stock-flow analysis.

Basic concepts. The rudiments of stock-flow analysis may be set forth most conveniently by
considering an economy in which all commodities are traded in central auction markets at
prices established by an independent market authority. In keeping with familiar procedure, we
may suppose that individual transactors formulate tentative trading plans at the outset of any
given market period, on the basis of given initial asset holdings and given rates of exchange (as
reflected in provisional price announcements by the market authority). In general these plans
will involve decisions about the quantity of each commodity to be purchased for current
consumption, to be purchased to hold for future disposal, to be sold from current production,
and to be sold from previously accumulated stocks.

Thus, for any commodity traded in the economy, e.g., the nth, and for any given market period,
we may suppose that there are defined the following:

An aggregate stock demand function, Dn, which indicates for any given vector of market prices,
P , and any given matrix of individual asset holdings, S (indicating the holdings of each
commodity by each individual), the gross quantity of a particular commodity that individuals
plan to hold for future disposal at the end of the current market period: Dn = Dn (P, S ).

(2) An aggregate flow demand function, dn, which indicates for any given P and S the gross
quantity of a particular commodity that individuals plan to consume during the current market
period: dn = dn(p,S ).

(3) An aggregate flow supply function, sn, which indicates for any given P and S the gross
quantity of a particular commodity that individuals plan to produce during the current market
period: sn = sn(P,S ).

(4) An aggregate stock supply quantity, Sn, defined as the sum of individual holdings of a
particular commodity at the outset of the current market period.

Given the “primitive” demand and supply relations (1) to (4), we may proceed immediately to
define various “derived” relations that are relevant for describing market trading plans for each
commodity. Specifically, we define planned net purchases on capital account—henceforth
referred to as holder excess demand—as the difference between aggregate stock demand and
aggregate stock supply: Zn ≡ Dn - Sn. Similarly, we define planned net purchases on current
account—henceforth referred to as user excess demand—as the difference between aggregate
flow demand and aggregate flow supply: zn ≡ dn-sn. Finally, we define market excess demand by
the identity xn ≡ zn + Zn. Thus, if N different commodities are traded in the economy, there will
in general be 3N market trading relations. Depending on the precise character of the
commodities traded, however, certain user and holder excess demands may be ignored. Just as
in established price theory, moreover, one of the market excess demand relations may be
assumed to be defined in terms of the others, by virtue of Walras' law.

Trading equilibrium . The demand and supply relations of stock-flow analysis, like those of
established price theory, are defined by underlying conceptual experiments in which all factors,
other than prices, that might influence current economic plans are assumed to be fixed. Thus,
the only requirement for individual trading plans to be mutually consistent is that the market
authority establish a set of provisional prices such that market excess demand is zero for each
and every commodity traded in the economy.

Accordingly, let us suppose that the finalization of individual trading plans in any given market
period is preceded by a bargaining process in the course of which provisional market prices are
varied in accordance with prevailing conditions of market excess demand. We shall not deal
with the details of this process (on this, see Bushaw & Glower 1957; Hadar 1965; Negishi 1962);
we shall simply assume that the bargaining process is globally stable and very heavily damped.
We may then argue that the process leads rapidly to the announcement by the market
authority of a set of market-clearing trading prices, at which binding exchange transactions may
be concluded between individual market participants. Since individuals will then be able (at
least in principle) to carry out their respective production, consumption, and asset-holding
plans precisely as scheduled, it is natural to associate the establishment of such a set of trading
prices with the attainment of a state of trading equilibrium.

In a pure stock economy, where individuals trade only on capital account, trading equilibrium
will occur if and only if prices are such that holder excess demand is zero for every commodity;
for in this case, user excess demand is identically zero in every market and x'tn a Ztn, where the
superscript t denotes the market period. Similarly, in a pure flow economy, where individuals
trade only on current account, trading equilibrium will occur if and only if prices are such that
user excess demand is zero for every commodity; for in this case, holder excess demand is
identically zero in every market and xtn ≡ z'tn. In a stock-flow economy, however, trading
equilibrium requires only that market excess demand be zero for every commodity, and this
condition may be satisfied even if user and holder excess demands are not zero, i.e., even if
individuals in the aggregate are planning to save or dis-save. To be sure, the market clearance
condition xtn ≡ ztn + Znt = 0 will automatically be satisfied if user and holder excess demands are
both zero. In general, however, this requirement is merely a sufficient, not a necessary,
condition for trading equilibrium in a stock-flow economy; for trading equilibrium will also
occur if z'tn = -Ztn.

The exception to the last rule concerns what might be called a mixed stock-flow economy, in
which some commodities are held for future disposal and some commodities are produced and
consumed but no asset can be produced or consumed and no commodity other than an asset
can be held for future disposal. An example of such a system is provided by the familiar
production and exchange economy of contemporary monetary theory in which the only assets
are fiat money and bonds. In such models, market excess demand for each commodity is
identically equal either to user excess demand or to holder excess demand for the same
commodity; hence, trading equilibrium cannot occur if the aggregate stock demand for any
commodity differs from aggregate stock supply. However, trading equilibrium may occur even
though some individuals plan to save, provided such plans are offset in each market by
dissaving plans of other individuals.

Intertemporal equilibrium . The significance of stock-flow analysis does not lie in what it adds
to existing accounts of market bargaining and the determination of equilibrium trading prices.
The interest of the subject lies, rather, in the fact that it provides for the first time an explicit
conceptual framework to analyze intertemporal saving and investment processes as market
phenomena.
In order to indicate the force of these observations, we begin by distinguishing between the
formation and the execution of individual economic plans. The bargaining process may be
presumed to lead to the establishment of a specific vector of trading prices at the end of any
given market period and so to the determination of a set of vectors of mutually consistent
production, consumption, and asset-holding plans. However, the theory of bargaining does not
itself say anything about actual trading; that is an entirely different subject, which requires
separate analysis.

The easiest way to characterize the trading process is to suppose that quantities actually
produced, consumed, and traded at the conclusion of the bargaining process are precisely as
planned. This assumption is logically permissible, of course, only in special circumstances,
namely, when no actual transactions take place except in trading equilibrium. Since this
restriction is not peculiar to stock-flow analysis, however, we shall accept it without question
here and proceed on the assumption that equilibrium trading plans are in fact carried out by
individual transactors at the end of each market period. The question then arises: will
completion of the trading process in one period and reopening of the bargaining process at the
beginning of the next period lead to the establishment of a set of trading prices identical with
or different from those established during the first market period?

If we grant the validity of accepted statical theories of household and business behavior, the
answer to this question is fairly straightforward. In pure stock economies, the execution of
plans at the end of one market period will not alter the real wealth or income of any transactor,
nor will any change in the distribution of assets within individual portfolios alter existing asset-
holding plans. Thus, the only effect of the trading process will be to eliminate any initial gaps
between desired and actual holdings of various commodities; i.e., individual, as well as
aggregate, holder excess demands will be zero for every commodity at the end of the trading
process. Therefore, other things being equal, in a pure stock economy a once-over execution of
economic plans will eliminate for all time the need for further trade.

A similar result is obtained for pure flow models. As before, the execution of plans does not
alter the real wealth or income of any household or the physical assets of any business. The
only effect of the trading process is to permit individuals to produce and consume as desired.
Therefore, other things being equal, in a pure flow economy a single bargaining process will
lead to the establishment of a set of trading prices and transactions quantities that will be
maintained throughout all subsequent time.

Our conclusions regarding pure stock and pure flow models may be summarized by saying that,
in such systems, trading equilibrium implies intertemporal equilibrium. Such models are not
without interest as devices for analyzing elementary bargaining processes. Moreover, they may
be made to generate nonstationary price and quantity time series by introducing price and
income expectations, wage and interest-rate rigidities, trading at disequilibrium prices, etc.
Under no circumstances, however, may such models be considered appropriate vehicles for any
but preliminary analysis of price-quantity behavior in an asset-holding economy. For this
purpose we must have recourse to stock-flow models.

In general, the execution of economic plans in a stock-flow economy will alter both the real
income and real wealth of some households and also will lead to changes in the asset holdings
of some businesses. Such effects are inevitable, indeed, if any transactor in the economy plans
to save or dissave at the outset of the trading process. As a rule, therefore, the trading process
will in itself lead some individuals to revise their production, consumption, and asset-holding
plans. Hence trading equilibrium does not imply intertemporal equilibrium in a stock-flow
economy.

The truth of the last remark is obvious in cases where the excess user demand for some asset is
nonzero in trading equilibrium; for this means that planned production of the asset differs from
planned consumption, and hence, that aggregate stocks of the asset will change from one market
period to another if plans are executed as scheduled during the trading process. The truth of the
remark is less obvious in the case of mixed stock-flow models, where excess user demand is
identically zero for every asset and aggregate stocks are necessarily constant over time. Trading
equilibrium then requires that holder excess demand be zero for every asset. However, this
does not imply constancy over time in the asset holdings of individual transactors following a
once-over redistribution of existing asset stocks. For in a stock-flow economy, unlike a pure
stock economy, individuals may continue to save and dissave indefinitely, even though
aggregate asset stocks never change.

Stability of intertemporal equilibrium . The distinction between trading equilibrium and inter-
temporal equilibrium is an inherent and distinctive characteristic of stock-flow analysis. To
describe individual economic plans in pure stock and pure flow models requires, as it were, just
one analytical dimension—prices. All other determinants of individual conduct are specified in
advance, and none can be altered by market trading. In such models logic does not compel us
to develop separate theories of trading and intertemporal equilibrium, even though we may
find it convenient to do so in certain instances. To describe economic plans in a stock-flow
model, however, requires two analytical dimensions—prices and individual asset holdings—
because individual asset holdings may be altered by market trading. In the case of stock-flow
models, therefore, logic does indeed compel us to develop separate theories of trading and
intertemporal equilibrium.
The problems posed by this characteristic of stock-flow analysis have to do mainly with the
stability of intertemporal equilibrium. As remarked earlier, the stability of intertemporal
equilibrium in pure stock and pure flow models is an immediate consequence of the stability of
trading equilibrium. Intertemporal disequilibrium may occur in stock-flow systems, however,
either because markets fail to clear or because individual transactors choose to save or dissave.
Therefore, even if bargaining processes are inherently stable, a stock-flow economy may fail to
converge to a state of intertemporal (stationary) equilibrium if individual asset-adjustment
processes are unstable. This possibility will most certainly be realized if one or more individuals
in the economy invariably save, and add to previously accumulated resources, some fraction of
current income (as is presumed to be true, for example, in von Neumann and other linear
models of economic growth and also in most theories of the consumption function). In general,
however, the saving behavior of individuals will depend on market prices and asset holdings, as
well as income. Therefore, even if individual asset-adjustment processes tend to be unstable at
some initial set of market prices, intertemporal instability of the economic system may be
avoided by appropriate intertemporal adjustments in market prices. Whether intertemporal
instability deserves to be regarded as anything more than a theoretical curiosity is an open
question at the present time. The answer is of obvious relevance for such practical problems as
the lag effects of monetary policy, econometric forecasting of consumption and investment
expenditures, and the existence and persistence of structural unemployment. To date,
however, the derivation of intertemporal stability conditions for various possible stock-flow
systems has received little explicit attention (Hadar 1965; Negishi 1962).

The preceding discussion does little more than scratch the surface of stock-flow analysis.
Because stock-flow analysis involves an integration of balance-sheet with income-expenditure
aspects of economic behavior, the subject directly embraces or indirectly bears upon virtually
every other branch of contemporary economic analysis: value and monetary theory, the theory
of income and employment, the theory of growth and economic development. What needs to
be emphasized, however, is not so much the virtual scope of stock-flow analysis as the severely
limited extent of actual knowledge about the properties of stock—flow systems.

First, we must recognize that most of the familiar weaknesses of established price theory, e.g.,
inadequate treatment of expectations phenomena and related problems of market
organization, are shared by stock-flow analysis.

Second, we must note that the explicit inclusion of asset variables in the theory of business
behavior forces us to think in terms of preference-maximization, rather than profit-
maximization, models, which leads to numerous analytical complications and uncertainties not
found in established theories. Hardly any work has been done so far in this area of stock-flow
analysis.
Third, we should remark that the present literature on the dynamics of multiple markets—
which, incidentally, includes nearly all modern treatments of the theory of income and
employment—is concerned with the dynamics of bargaining, rather than the dynamics of
bargaining and trade; i.e., it does not deal at all with problems of intertemporal equilibrium.
The relevance of this literature for interpreting actual market behavior is dubious, to say the
least. However, since a satisfactory account of the intertemporal dynamics of stock-flow
systems has yet to be developed, these shortcomings of established theory provide no present
grounds for congratulatory remarks about stock-flow analysis.

Finally, a comment is in order concerning a problem of fundamental importance that is only

dimly foreshadowed in earlier discussion. The whole of stock-flow analysis and most of
contemporary value and monetary theory rest on the assumption that market exchange is a
complicated form of barter, involving multiple, rather than double, coincidence of wants. This is
reflected in the proposition known as Walras‘ law, which asserts that units of any given
commodity (goods or money) constitute effective means of payment for units of any other
commodity. This can only be true in an economy where trading processes in all markets are
rigidly synchronized, so that purchases and sales of different commodities can be set off against
each other without having recourse to intermediate market transactions. If trading processes
are not synchronized, we move from the barter economy of “classical” economics to the money
economy of John Maynard Keynes; from a world where supply creates its own demand to a
world where demands are directly constrained by current accruals of cash and cash substitutes
and where supplies are directly constrained by current levels of factor employment. To
investigate the dynamic properties of such systems clearly requires the use of stock-flow
models. As of this time, however, stock–flow analysis provides nothing more than a foundation
for future research in this area.

DIFFERENCE BETWEEN STOCK AND

FLOW
The distinction between a stock and a flow is very significant and we should clearly understand
it since national income itself is a flow.

The basis of distinction is measurability at a point of time or period of time. Be it noted that
both stocks and flows are variables. A variable is a measurable quantity which varies (changes).
(a)Flow Variables:
A flow is a quantity which is measured with reference to a period of time. Thus, flows are
defined with reference to a specific period (length of time), e.g., hours, days, weeks, months or
years. It has time dimension. National income is a flow. It describes and measures flow of goods
and services which become available to a country during a year.

Similarly, all other economic variables which have time dimension, i.e., whose magnitude can
be measured over a period of time are called flow variables. For instance, income of a person is
a flow which is earned during a week or a month or any other period. Likewise, investment (i.e.,
addition to the stock of capital) is a flow as it pertains to a period of time.

Other examples of flows are: expenditure, savings, depreciation, interest, exports, imports,
change in inventories (not mere inventories), change in money supply, lending, borrowing, rent,
profit, etc. because magnitude (size) of all these are measured over a period of time.

(b) Stock Variables:

A stock is a quantity which is measurable at a particular point of time, e.g., 4 p.m., 1st
January, Monday, 2010, etc. Capital is a stock variable. On a particular date (say, 1st April,
2011), a country owns and commands stock of machines, buildings, accessories, raw materials,
etc. It is stock of capital. Like a balance-sheet, a stock has a reference to a particular date on
which it shows stock position. Clearly, a stock has no time dimension (length of time) as against
a flow which has time dimension.

A flow shows change during a period of time whereas a stock indicates the quantity of a
variable at a point of time. Thus, wealth is a stock since it can be measured at a point of time,
but income is a flow because it can be measured over a period of time. Examples of stocks are:
wealth, foreign debts, loan, inventories (not change in inventories), opening stock, money
supply (amount of money), population, etc.

The distinction between flows and stocks can be easily understood by comparing the actions of
Still Camera (which records position at a point of time) with that of Video Camera (which
records position during a period of time).

USE OF STOCK AND FLOW

 In Microeconomics
In micro economics, the concept of stock and flow are related to the demand for and supply of
goods. The market demand and supply of goods. The market demand and supply of goods at a
point of time is expressed as stock. The stock demand curve of good slopes downward from left
to right like an ordinary demand curve, which depends upon price. But the stock supply curve of
a good is parallel to the y axis because the total quantity of stock of a good is constant at a
point of time.

On the other hand, the flow demand and supply curves are like the ordinary demand and
supply curves which are influenced by current prices.

But the price is neither a stock nor a flow variable because it does not need a time dimension.
Nor is it a stock quantity. In fact, it is a ratio between the flow of cash and flow of goods.
 In Macroeconomics
The concepts of stock and flow are used in more in macro economics or in the theory of
income, output and employment. Money is a stock variable, whereas the spending the money
is a flow variable. Wealth is stock, income is flow, saving by a person within a month is flow,
while the total saving on a day is stock. The government debt is stock while the government
deficit is a flow and its outstanding loan is a stock.

Some macro variables like imports, exports, wages, income, tax payments, social security
benefits and dividends are always flow concept. Such flows do not have direct stocks but they
can affect other stocks indirectly, just as imports can affect the stock of capital goods.

A Stock can change due to flow, but the size of flows can be determined itself by changes in
stock. This can be explained by the relation between stock of capital and flow of investment.
The stock of capital can only increase with the increase in the flow of investment, or by the
difference between the flow of production of new capital goods and consumption of capital
goods. On the other hand, the flow of investment itself depends upon the size of capital stock.
But the stocks can affect flows only if the time period is so long that the desired change in stock
can be brought about. Thus, flows cannot be influenced by changes in stock in the short run

Lastly, both the concepts of stock and flow variables are very important in modern theories of
income, output, employment, interest-rate, business cycles etc.

STOCK AND FLOW IN ACCOUNTING

Thus, a stock refers to the value of an asset at a balance date (or point in time), while a flow
refers to the total value of transactions (sales or purchases, incomes or expenditures) during an
accounting period. If the flow value of an economic activity is divided by the average stock
value during an accounting period, we obtain a measure of the number of turnovers (or
rotations) of a stock in that accounting period. Some accounting entries are normally always
represented as a flow (e.g. profit or income), while others may be represented either as a stock
or as a flow (e.g. capital).

A person or country might have stocks of money, financial assets, liabilities, wealth, real means
of production, capital, inventories, and human capital (or labor power). Flow magnitudes
include income, spending, saving, debt repayment, fixed investment, inventory investment, and
labor utilization. These differ in their units of measurement. Capital is a stock concept which
yields a periodic income which is a flow concept.

CONCLUSION
Considering labor as a variable factor, as done by the Neoclassical model,does not leave any
theoretical space to analyze neither the stock of labor, neither entry and exit flows.
This has made impossible to develop a theory of labor demand centered on men, their
characteristics and, what is more important, their history; to link exits from education to entries
into labor market, and exits from employment to entries into retirement.
The definition of the concept of stock provided by implies the identification between the
concept of stock and the concept of population. This should not be surprising given the fact that
the two words are used in an interchangeable ways in many instances and that demographic
tools have been used in many areas outside the study of human populations. It will suffice to
remember the growing number of studies in which the stock (population) of firms is
“explained” as the outcome of births and deaths and the fact that numerous capital theory
models consider different generations of machines.
Moreover, in the last 60 years numerous labor market studies have used demographic tools not
only to produce empirical analysis of labor turnover, but also to analyze, for instance,
unemployment duration. Since the concepts of stock and population coincide(they both refer
to a set of individuals that have a common characteristic and are the result of processes of
accumulation and de-accumulation) the tools developed by demographers to analyze
population can be used to analyze labor market stock variables(employment and labor force.
This opens the door to a more pronounced integration between demographic procedures and
economic theory.