Question

Explain the difference between a flow variable and a stock variable. Classify each of the following as a stock or a flow: income, wealth, saving, savings, consumption, investment, government expenditures, net exports, GDP.

Short answer

Answer: Stock variables are wealth and savings. All the other items - income, saving, consumption, investment, government expenditures, net exports, and GDP - are flow variables.

Step-by-step solution

Define Flow Variable and Stock Variable

A flow variable is a measure of some activity in an economy over a specific period of time, usually measured in rates (e.g., per hour, per day, per year). In contrast, a stock variable is a measure of a quantity that exists at a specific point in time, without reference to any time period.

Classify Income

Income is a flow variable, as it measures the money someone receives over a period of time (e.g., a month or a year).

Classify Wealth

Wealth is a stock variable, as it represents the total value of assets owned by an individual or an entity at a specific point in time.

Classify Saving and Savings

Saving is a flow variable, as it measures the amount of money an individual or entity sets aside from their income over a period of time. Savings, on the other hand, is a stock variable, as it represents the total accumulated amount of money that an individual or entity has set aside at a specific point in time.

Classify Consumption

Consumption is a flow variable, as it represents the total amount of goods and services consumed by individuals or entities over a period of time.

Classify Investment

Investment is a flow variable, as it refers to the expenditure on capital goods that will be used in the future to create more goods and services over a period of time.

Classify Government Expenditures

Government expenditures are a flow variable, as they represent the total amount of government spending on goods, services, and transfer payments over a period of time.

Classify Net Exports

Net exports is a flow variable, as it represents the difference between a country's total exports and imports over a period of time.

Classify GDP

Gross Domestic Product (GDP) is a flow variable, as it measures the total value of goods and services produced by an economy over a specific period of time (usually a year). In summary, all items on the list are flow variables, except for wealth and savings, which are stock variables.