Chapter 5 - Government Budget

Economics Class 12
Macroeconomics

## Is Debt and Deficit Stock or Flow?

We know that Stock is measured at a particular point of time

Debt is measured annually as on 31 March, hence it is a Stock

Example = Deficit as on 31 March 2021

Flow is always defined over a period of time

Hence, Deficit is a Flow as it is measured for a particular period

Example

Budgetary Deficit for year 2020-21

## Deficit is a Flow which adds to Stock of Debt.

### Explain

We know that

Debt is measured annually as on 31 March, hence it is a Stock

Also

Deficit is a Flow as it is measured for a particular period

More the Deficit, More the Govt has to borrow to meet the deficit

Hence, Deficit leads to increase in Debt

So we can say that

Deficit is a flow which adds to stock of Debt

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### Transcript

Is Debt and Deficit Stock or Flow? Stock It is a variable which is measured at Particular point of time Flow It is a variable which is measured Defined over a period of time Example Debt Example Deficit Debt as on 31 March 2021 Deficit for year 2020-21 Particular Point of time as on 31 March 2021 (STOCK) Transactions for the Period 1 Apr 2020 to 31 Mar 2021 (FLOW) Deficit is a Flow which adds to Stock of Debt Deficit is Flow because it is measured for Period of time 2020-21 Debt is a Stock because it is measured at a particular point of time (31-Mar-21) What happens in case of Deficit? In case of Deficit Expenditure more than Receipts To cover the gap Government Borrows This increases Debt More the deficit More the debt So deficit increases Debt We say Deficit is a flow which increases Stock of Debt Example- Why More the deficit, More the Debt Expenditure Receipts Deficit To meet deficit Govt takes loan Earlier Now 2000 2000 1500 1400 500 600 500 600 Note if Deficit increases from 500 to 600 Debt increases from 500 to 600 Hence, More the Deficit, More the Debt