Circular flow of money is of two types — real flow and monetary flow. Simply flow of goods and services is called real flow and flow of money (income) is called money flow.
(i) Real Flows. Real flows refer to flows of goods and services. These are called real flows because they consist of actual goods and services. In the context of national accounting, real flow implies flow of factor services from household sector to the firm (or producing) sector and the corresponding flow of goods and services from firm sector to the household sector. Thus flows of goods and services between firm sector and household sector are real flows. Such flows are continuous and there is no beginning or end point in these flows. In Fig. 6.1, the inner two arrows indicate real flows.
(ii) Money Flows. These refer to flows of money in the form of factor payments and consumption expenditure. The monetary flows occur because it is through money that various transactions are conducted bringing flows of money from one sector to another. When factor incomes (rent, wages, interest and profit) flow from firm sector to the households as reward for their factor services, these are called money flows. Similarly when households spend their incomes on purchase of goods and services produced by the firm sector, money flows back to the firm sector as household expenditure. These also indicate money flows. In short, flows of money between firm sector and household sector are monetary flows.
Based on the simplified model of two sectors (household and firm sectors), all these flow's are depicted in the following Fig. 6.1. The inner two arrows (anticlockwise) indicate real flows and the outer two arrows (clockwise) reflect monetary flows.
Fig. 6.1
Dual role (of buyer and seller) of each sector perpetuates the circular flow between two sectors.
