Money flow and real flow are the two main aspects of the circular flow of income economic model. Both refer to exchanges of goods and services for money, but the two concepts differ in how they refer to the opposite sides of these exchanges as they relate to individuals and companies. Real flows refer to the flow of the actual goods or services, while money flows refer to the payments for the services (wages, for example) or consumption payments.
The Circular Flow of Income
In a modern exchange economy, one in which all economic exchanges involve money, the circular flow of income model attempts to depict the back and forth flows of money and services between individuals (or households) and companies. In explaining the flow of money, this economic model uses the terms "money flow" and "real flow" to designate the nature of the different exchanges that take place.
Within the model, individuals are considered to be both the possessors of factors of production (such as labor, services or property) and as consumers, the purchasers of goods. Companies are considered to be both the producers of goods and the purchasers of factors of production.
Real Flows Versus Money Flows
Real flows include the factors of production, such as labor or land, that flow from individuals to companies, as well as the flow of goods and services from companies to individuals.
Meanwhile, money flows occur when companies pay wages in return for labor or services provided by individuals, as well as when individuals spend money to obtain goods or services produced by companies.