Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Stocking up and going with the flow

What makes someone rich: earning a high salary; having a big house; having a lot of money in the bank; or something completely different such as having a loving family?

Because of the ambiguity, economists don’t really like using the word ‘rich’. Instead, if someone has a large salary, they say that they have a high income. If they have a lot of money in the bank or own a number of properties, they say that they’re wealthy.

Income and wealth are related but different concepts. Economists call income a flow variable. A bit like how a shower sprays a certain amount of water every minute, income pays a certain amount of money over a certain period of time. You see income quoted as an hourly, daily, weekly, monthly or yearly rate.

Wealth, on the other hand, is a stock variable. A bit like how a bath has a certain amount of water in it at a point in time, your wealth is the total value of your assets at any given point in time.

Unlike income, when you’re describing someone’s wealth, you don’t need to say over what period of time. So John may say that his income is £25,000 per year, but for his wealth he’d just say £100,000.

Of course, an intimate relationship exists between someone’s income and his wealth. Wealth is the accumulation of a lifetime of income less expenditure. Other examples of stocks and flows are:

A person’s level of debt is a stock, whereas his borrowing from year to year is a flow.


The total number of unemployed workers is a stock, whereas the weekly number of people finding (and losing their) jobs is a flow.

The total number of houses in the UK is a stock, whereas the new houses

that are built (and destroyed) every year is a flow.


Differentiating investment and capital

Investment and capital are perhaps the most easily misunderstood terms that economists use. The reason is because what an economist and non-economist mean by them is very different!