The flow of money and the real flow are the two main aspects of the economic model of circular income flow. Both refer to exchanges of goods and services for money, but the two concepts differ in the way that they refer to the opposite sides of these exchanges when it comes to people and businesses.
Real flows refer to the flow of real goods or services, while money flows refer to payments for services (wages, for example) or payments for consumption.
- Money flows represent the way money and credit circulate in the economy when income is converted into savings and investment and vice versa.
- Real flows represent the way that raw materials and products and services are produced and consumed in the economy.
- While mainstream economists often dismiss the relationship between real and money flows, many others understand that the two are intrinsically linked.
The circular flow of income
In a modern exchange economy, in which all economic exchanges involve money, the circular income flow model attempts to represent the flows of money and services back and forth between individuals (or households) and firms. In explaining the flow of money, this economic model uses the terms “money flow” and “actual flow” to designate the nature of the different exchanges that take place.
Within the model, individuals are considered to be both the owners of factors of production (such as work, services or property) and consumers, the buyers of goods. Firms are considered to be both producers of goods and buyers of factors of production.
Watch now: How does the circular flow model work?
Real flows vs. money flows
Real flows They include factors of production, such as labor or land, that flow from people to companies, as well as the flow of goods and services from companies to people.
Meanwhile, money flows They occur when companies pay wages in exchange for labor or services provided by people, as well as when people spend money to obtain goods or services produced by companies.
The real economy versus the money economy
When mainstream economists speak of economics, they are most likely referring to the “real” economy, that is, the production and consumption of real goods and services. In this model, money is simply a “veil” that obscures the underlying real production economy, where money serves as a lubricant to make trade and transactions more efficient and less expensive.
However, other economists, such as those in the Keynesian and monetarist traditions, believe that money and finance are real factors in the economy and cannot be ignored as a mere veil. Karl Marx, writing about capitalism in the 19th century, related real flow and money using his conception of M – C – M ‘, where money is converted into commodities (M – C), which are then sold to obtain a higher profit. than the money put in (M ‘).
The 2008 financial crisis, which resulted in part from the lack of financial liquidity in the credit and money markets, speaks to the importance of the money economy, especially in today’s global market.