National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview

Chapter 10
THE ACCELERATION PRINCIPLE

FLOWS AND STOCKS IN FUNCTIONAL RELATIONSHIPS

National income accounts are records of flows, such as the flow of goods and services off the assembly lines, the flow of incomes received, and the flow of saving and investment. Certain flows, such as goods consumed, are created and disappear; they can be measured only at some convenient point as they pass along their way, for they are never stopped and accumulated. Other flows, such as the increase in inventories and capital goods, or the amount of saving, imply the existence of stocks or accumulated balances. Up to this point, we have defined functions solely in terms of flows acting one upon another: a swell or evaporation of one flow (the independent variable) affects the volume of another flow (the dependent variable) according to a preconceived pattern defined by their functional relationships. Sometimes, however, functions may vary with the level of stocks. For example, a change in inventories may depend on both the changed flow of consumer demand and the current level of inventory stocks.


THE RELATION APPLIED TO INVENTORY CHANGE

The consumption function defines the relationship between income and the demand for consumer goods. Together with the amount of stocks on hand, the consumer demand is an independent variable on which the purchases of intermediate products farther back in the vertical stages of production are in turn dependent. Thus a marginal propensity to consume of, say, 90% does not always mean that an increase in personal disposable income of $100 will be followed by an increase in consumer-goods output of $90. Much may depend on whether the level of stocks is $50 or $80 to begin with, as well as on how dealers assess future demand.

Let us suppose that a dealer in a particular commodity keeps inventory stocks valued (on an average) at 20% of his annual sales. When stocks fall to, say, 15% of annual sales, he may order enough to bring the level to, say, 25%; but day in and day out the average runs about 20%. Thus his

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