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Tutor's Tips > Economics Class 12 > Concept of Real Flows and Money flows

Economics Class 12

Concept of Real Flows and Money flows

By Dilgeerjot Kaur 4 Min Read S Updated -April 23, 2022

ConceptofRealFlowsandMoneyflows
RealflowsandMoneyflowsexplaintheintersectoralflowsofgoodsandservices
andmoneyfromonesectortoanotherinaneconomy.
Tutor'sTips
MoneyElow
RealFlow

RealFlow

MoneyFlow L Concept of Real Flows and Money flows

S HA R E O N

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b  Real flows and Money flows explain the intersectoral flows of goods and services and money from one sector to another in
an economy.

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Table of Contents

Real Flows and Money Flows or Intersectoral Flows:

Real Flows:

Money Flows:

Money Flows as Reciprocal of Real Flows:

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Real Flows and Money Flows or Intersectoral Flows:

It refers to the flows driven by intersectoral dependence where goods and services or money is transferred from one sector
to another. Intersectoral dependence defines how different sectors of an economy are dependent on each other. The
following observations explain the intersectoral dependence:

1. The household sector is dependent on the producer sector for goods and services, for consumption.

2. With this, The producer sector is dependent on the household sector for the supply of factors of production. These are
required for the production of goods and services in the economy. Hence, these are also known as Factor services.

3. Tax and non-tax revenues are the main source of income for the government. Thus, the government is dependent on the
household and producer sector for revenue.

4. The producer and household sector depend upon the government for administrative services besides law, order and
defence.

Intersectoral flows can be classified as :

1. Real flows

2. Money flows

Real Flows:

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It refers to the flow of goods and services among different sectors of the economy. For example, the flow of factor services
from households to the producer sector and the flow of goods and services from the producer sector to the household
sector.

Money Flows:
It refers to the flow of money among different sectors of the economy. For example, the flow of factor payments from the
producer sector to the households and the flow of money to the producer sector by the household sector on account of
purchase of goods and services.

Money Flows as Reciprocal of Real Flows:

In a barter system of exchange, where goods are exchanged for goods, there is only real flow in the economy. Workers
provide their labor services on farms and fields. Thus, it is known as real flow. They received grains in return, which is also real
flow. However, the barter system of exchange worked successfully only when human wants were limited. Thus, with the
multiplicity of human wants, mutual interdependence also multiplied. Consequently, the barter system proved to be an
inefficient system of exchange. As a result, the monetary system of exchange is introduced in which money is used as a
medium of exchange. Thus, the money flows are the reciprocal of real flows in that economy.

The above figure shows the real flows in terms of goods and services sold by firms to households. And, the flow of factor
services rendered by households to producers. Both these flows are real flows as they involve the movement of goods and
services from one sector to the other. Money is not involved in this.

The above figure shows the money flows in terms of the flow of money from households to the producers for the purchase of
goods. And, the flow of money from the producers to the households for the purchase of factor services. Each money flow is
a reciprocal of the real flow. Thus, money flow from households to the producers is a reciprocal of the real flow of goods
from producers to households. Similarly, money flow from producers to the households is a reciprocal of the real flow of
factor services from the households to the producers.

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Comment if you have any questions.

References:

Introductory Microeconomics – Class 12 – CBSE (2020-21)

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