An analogy of a reservoir may be helpful in thinking about a nation’s capital stock, investment, and depreciation. Picture a reservoir that has water flowing in from a river and flowing out from an outlet after it passes through turbines. The volume of water in the reservoir at any particular point in time is a "stock." In contrast, the inflow from the river and outflow from the outlet are "flows." Such flows are always measured over some period of time. Suppose that we measure these inflows and outflows at the end of each week and compare them with our measurements at the beginning of the week. The volume or "stock" of water in the reservoir will rise if the weekly inflow exceeds the weekly outflow. It will fall if the inflow is less than the outflow. And, it will remain constant if the two flows are equal. We could simplify further by thinking in terms of the net inflow (inflow minus outflow) into the reservoir, where the net inflow can be positive or negative. The volume of water in the reservoir will rise if the net inflow is positive, decline if it is negative, and remain constant if it is zero. Now let’s apply this analogy to the stock of capital, gross investment, and depreciation. The stock of capital is the total capital in place at any point in time. Changes in this stock over some period of time, for example, one year, depend on gross investment and depreciation. Gross investment (the addition of capital goods) adds to the stock of capital while depreciation (the using up of capital goods) subtracts from it. The capital stock increases when gross investment exceeds depreciation, declines when gross investment is less than depreciation, and remains the same when gross investment and depreciation are equal. Alternatively, the stock of capital increases when net investment (gross investment minus depreciation) is positive. When net investment is negative, the stock of capital declines, and when net investment is zero, the stock of capital remains constant. (1) The distinction between stocks and flows applies to several other elements of economics. For example, savings (with an ending "s") is a stock and saving per week is a flow. Business inventories is a stock and net changes in business inventories over the past year is a flow. Wealth is a stock and monthly income is a flow. Your checkbook balance is a stock and your monthly deposits and withdrawals are flows.

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