Answer to Question 3:

You have to decide which of the following items are stocks and which are flows: 1) your knowledge about driving, 2) the number of car accidents you had last year, 3) your shoes, 4) the level of your income. Choose the best option below.

1. Items 1) and 3) are stocks.

2. Items 1) and 4) are stocks.

3. Items 1), 3), and 4) are stocks.

4. All of the items are stocks.

Choice 1 is correct. Your knowledge about driving is part of your stock of human capital. It produces services taking the form of safe travel. Your shoes are part of your stock of physical capital. They produce the services of keeping your feet dry and comfortable. The number of car accidents per unit time, is a flow. The total number of car accidents you have ever had would be the corresponding stock. Your income is the flow of returns in the form of goods, services and leisure you can enjoy from the total stock of physical and human capital you own. Its size depends, of course, on how you manage your stocks of both types of capital---that is, how good you are at investing, and how you take care of your health.

Keep in mind that a stock represents the level of something at a given point in time---your manners, your habits, the number of cars you own, the number of cars in the economy, the number of apples on the shelf in the grocery store, etc. Flows represent streams through time such as a stream of output from the stock of capital that produces it or a stream of additions to of subtractions from a stock of capital. You might have been confused about your income being a flow when it was referred to as the level of income. Though we very frequently talk about the level of the stock of something, it is also appropriate to talk about the level of a flow as in, for example, the level of a river.

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