Difference Between Real Flow and Money Flow

Edited by Diffzy | Updated on: July 04, 2023

       

Difference Between Real Flow and Money Flow

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​​​​​​​Introduction

When we talk about economics and its flow, we simultaneously understand the real flow and the flow of money. Under the umbrella term of circular flow, both actual and financial flow are included. An economy includes a cyclic flow that keeps up with everything. There's a circular flow of income which includes both real flow and money flow. Although they are part of circular flow yet they hold certain differences which need to be understood. The core ideas in economics are real flow and money flow, and these concepts can also be related to one another. By way of example, household economies are included in the real flow, where every step of production occurs. Money is used to obtain the advantages of production operations. Some might even say that each of these concepts is distinct from one another despite the possibility of their independence.

Real Flow vs Money Flow

The real flow takes place when goods and services circulate within an economy, as opposed to the money flow, where transactions are carried out in exchange for money. Due to money's disappearance from the real flow, there might be a problem concerning the barter system, in which items can be exchanged for goods regardless of money flow discourages such a system. The production of goods and services as well as their consumption are both included in the real flow, whereas the final value of the goods and services that are produced and consumed in an economy is incorporated in the money value.

The gross domestic product (GDP) of a nation and other equivalent measuring parameters can be applied to figure out the real flow in an economy, however, only the money itself can be used to assess the money flow. Value in a money flow is conveyed through the medium of money. Only two sectors are included in monetary transactions, although many different industries play a role in the actual flow of an economy.

Difference Between Real Flow And Money Flow In Tabular Form

Parameters of ComparisonReal FlowMoney Flow
MeaningThe real flow takes place when products and services are manufactured for the two sectors and afterward consumed by both the household and commercial sectors.A money flow happens when financial resources are used to allocate to the physical sector's manufacturing and funding facilities.
Another nameThe other name for real flow is Physical flow as in it commodities are involved in tangible form.The other name for money flow is nominal flow.
MeasurementReal flow can be measured in terms of a nation's GDP and terms of quantitative values.Money flow can be measured in terms of monetary value which includes a country's currency.
Level of difficultyReal flow is difficult to calculate as sometimes things do not have an account and cannot be measured further.The level of difficulty is moderate as only those things are included which have their monetary values.
MotionIt moves clockwiseIt moves anticlockwise

What is Real Flow?

Real flow can be characterized as the flow of goods and services that are generated or developed for the domestic market as a whole. This actual flow is meant for household sector consumption. In general terms, goods, services, and consumption-related sectors have been deemed to be basic elements of real flow. Real flow frequently gets referred to as the actual flow or the physical flow. The reason behind this for other flows can be understood from the names by themselves as in real flow, commodities and services are present. These are tangible resources.

Production factors flow from household sectors to business sectors and from business sectors to household sectors. This economic flow is real and continuous. It's not as if the production involves only a few hours or days. The process keeps happening regularly and has no endpoint.

The real flow includes some production elements that are used to carry out every one of the manufacturing and servicing tasks. Some of these are as follows:

  • Land
  • Labor
  • Plant and machinery
  • Other resources

These production factors are all of the greatest significance and serve as the foundation of every economy and nation. The aforementioned components are not merely restricted within the borders of one's domestic country. The factor mentioned above helps in the allocation of resources so that the production activities can be carried out smoothly without any kind of hindrance. One of the most challenging tasks will also be to gain access to these manufacturing factors as the economic scenario changes constantly and is not stable.

 In a number of sectors, such as GDP measurement, actual flow has an enormous impact.

This impact can be explained in the following ways:

Gross Domestic Product or (GDP)

As it is common knowledge, a country's GDP represents the value of its commodities and services. It is essential that we understand GDP to calculate the country's total income, as it relies on this data for its estimation.An economy's output is influenced by its GDP. The home sector, sectors of government and industrial activities also have a real role to play. This flow includes the consumer sector, for which production happens to be carried out. Money travels from the household sector to the business sector in the form of payments for goods that consumers consume.

Income Distribution

We exclusively address manufacturing as well as production in real time. Nevertheless, it does have an impact on income distributions. As in any kind of economy, commodities produced will be consumed. We need to buy them for consumption. On top of that, production demands the employment of workers and other resources, which are remunerated with wages and salaries. Eventually the workers' and producers' revenues will be spent on goods and services, leading to a cycle of economic activity.

What is Money Flow?

Similar to real flow, the concept of money flow symbolizes a cyclical flow of income. The movement of money through an economic system is commonly referred to as a money flow. Money flow can also be referred to by the term notional flow because the components that constitute to form the circulation of money are ethereal and cannot be physically observed. Money flow can be evaluated in terms of monetary currency. The currencies can be of any country, such as the Indian rupee, US dollar, Japanese yen, British pound, and so on. The manufactured products and services are always calculated quantitatively and have monetary worth.

The circular flow of revenue can help us comprehend the notion of money flows more effectively.

The circular flow of income comprises money flowing from household sectors to business sectors, government sectors, and financial markets. Consider the production of goods and services, which necessitates an investment of capital and labor. To engage labor and work for wages and raise salaries customers will additionally be required to make payments and expenses to get access to the final products for consumption. When a transaction is completed, money flows from the household sectors to those in the manufacturing or retail sectors. Given that the final products are charged with taxes which the customers who purchase them must pay, the government sectors are occasionally also mentioned.

Public goods and services including national defense, infrastructure, and education are provided by the government utilizing tax money. Rent, salary, compensation, incentives, and dividends constitute a few of the payment methods in which the household sector receives reimbursement. For the purpose to fulfill its requirements and wants, the household sector uses the funds that it has earned for purchasing produced goods and services. For this purpose, all revenues from the manufacturing sector shall be reinvested back into expenditure relating to consumption.

The points that follow correspond to some of the parties that are involved in the money flow:

  • Financial markets and financial institutions
  • Government sectors
  • International trade markets

Financial Markets And Financial Institutions

Stocks and share trading serve as components of the financial markets. It is straightforward for people to obtain the funds necessary to carry out profitable endeavors thanks to mortgages that emerge from the securities markets.  When resources are few, the manufacturing industry may resort to financial markets and institutions for financial resources. These markets make revenues in the form of interest in exchange for their financial assistance.  In this way, household sectors generate income through investments, and these markets participate in trading to generate returns on such investments. Besides being related to the financial markets, financial institutions are carrying out similar business.

Government Sectors

Taxes are the primary source of revenue for the government sector. These are the  only ways in which the government receives funding from the public and other sectors is through this type of way. Taxes are how funds are transferred from the population as a whole to the government, and the government makes use of these funds to provide subsidies for many different kinds of goods and services. When the government runs low on resources, it resorts to banks and financial markets for assistance. Similarly, if it has a pool of resources, it will make investments in the market.

International Trade Markets

Products and services aren't merely produced for domestic consumption or to meet the requirements of one economy. Gains from the global markets can be obtained through trading. It will aid in exports, which will inevitably lead to an increase in income and the purchasing power of a company's currency. It is crucial for a country that expands its business operations and export to other markets to strengthen its economy. A country's economy can be boosted by trading on the international securities market in addition to exports to other nations

Main Differences Between Real Flow And Money Flow (in Points)

  • A real flow is one in which production and manufacturing activities take place for consumer satisfaction and trading whereas a money flow is one in which the money is transmitted from the household sector to the business sector.
  • The real flow is also known as actual flow or physical flow whereas money flow is known as nominal flow
  • The real flow works clockwise while the money flow works anticlockwise
  • The barter system problem might come up in the real flow, however, there is no chance for it to arise in the money flow because money is used to make payments for commodities, eliminating the likelihood of a barter system problem.
  • The real flow and the monetary flow are part of a distributed income stream, which is distinct from one another.Income is transferred from the manufacturing sector to the business sector in the form of purchasing and other expenses.
  • The real flow's measuring component is the GDP, which makes it possible for the measurement of created goods and services, whereas the money flow's measuring component is money or currencies which include the yen, dollar, rupee, etc
  • In the real flow, factors of production such as land, labor, and services are included as well, thereby helping in the generation of factor income, but in the money flow, factor income is generated by utilizing these factors of production in the form of rent received utilizing lending as well as providing services.

Conclusion

Considering every detail that has already been discussed thus far about actual flow and money flow, it could potentially be concluded that both are distinct layers of the same circular flow of income. For an economy to function successfully and efficiently, they have equal significance. However, they cannot be used in place of one another or be collectively referred to as the same. Although the circular flow of income model is a skewed view of the economy, it presents a valuable framework for comprehending how various economic agents interact.

Money will continue to flow in the exact opposite direction from where it is actually moving, giving the impression that they are moving simultaneously while nevertheless retaining their distinctions. This happens when the genuine flow of money is moving in one way. It is readily apparent that there may be issues with the barter system in the real world, even though the economy is growing rapidly in all directions. While the flow of financial resources eliminates these kinds of complications, building an equitable and advantageous system that makes transactions simple.

References

  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.zigya.com/amp/study/book%3Fclass%3D12%26board%3Dcbse%26subject%3DEconomics%26book%3DIntroductory%2BMacroeconomics%26chapter%3DNational%2BIncome%2BAccounting%26q_type%3D%26q_topic%3D%26q_category%3D%26question_id%3DECEN12051509&ved=2ahUKEwjhvIfb4cH-AhWISWwGHQ_3CzkQFnoECHAQAQ&usg=AOvVaw3qYz3GcYh4-7D0xIr2yBDz
  • CBSE class 12 ncert

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"Difference Between Real Flow and Money Flow." Diffzy.com, 2024. Mon. 10 Jun. 2024. <https://www.diffzy.com/article/difference-between-real-flow-and-money-flow>.



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