This is the real flow of goods and services from firms to households, and it is indicated by the green dotted line in the red circle in the following diagram. An example of this flow would be the actual groceries you buy from, say, your local supermarket. Monetary or money flows There are two monetary flows in the circular model. The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period of time. It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers price.
- Distinguish Between Real Flow & Money Flow
- Distinguish Real Flow From Money Flows
- What Is The Difference Between Real Flow And Money Flow
Real flows
There are two real flows in the circular model:
- Factors of production from households to firms
- Good and services from firms to households
Factors of production from households to firms
From households to firms, there is a flow of factors of production through the factor market, as illustrated by the green dotted line in the red circle.
This the is a real flow. An example of this flow would be you leaving your house in the morning to go to work at a firm. This is an example of a real flow of labour.
Then there is also the flow of capital, land and entrepreneurs from households to firms. This real flow of the factors of production takes place through the factor market.
Distinguish Between Real Flow & Money Flow
Goods and services from firms to households
Firms use the factors of production to produce goods and services that they make available to households through the goods market. This is the real flow of goods and services from firms to households, and it is indicated by the green dotted line in the red circle in the following diagram.
An example of this flow would be the actual groceries you buy from, say, your local supermarket.
Distinguish Real Flow From Money Flows
Monetary or money flows
There are two monetary flows in the circular model:
What Is The Difference Between Real Flow And Money Flow
- Income from firms to households
- Spending from households to firms
Income from firms to households
From firms to households, there is an income flow through the factor market as firms pay households for the use of the factors of production owned by households, as indicated by the orange solid line in the blue circle in the following diagram. This is a monetary flow.
An example of this flow would be you receiving payment in the form of a wage by the firm you are working for. Rent for land, interest for capital and profits for entrepreneurs are all monetary flows and part of the income flow.
Spending from households to firms
Households use their income to pay for the goods and services they receive from firms. This payment for goods and services is a monetary flow from the households to firms through the goods market as indicated by the orange solid line in the blue circle in the following diagram, and it is the spending flow. An example of this flow would be when you pay for your groceries.
In the following video clip Willie explains the difference between real and nominal flows: