PathSet Publications
TYPES OF CIRCULAR FLOW
Real Flow: It refers to the flow of factor services (land, labour, capital, and enterprise) from household to firms and the corresponding flow of goods and services from firms to households. It is also known as ‘Physical Flow’.
As seen in the above diagram, the households sector provides factor services to the producing sector i.e. firm which, in turn, provide goods and services to them as a reward for their productive services.
Real flow determines the magnitude of growth process in an economy. For example, when more factor services are offered to firms, then volume of production will be more and it speeds up the process of economic growth.
Money Flow: It refers to the flow of factor payments (Rent, wages, interest, and profit) from firms to households for providing factor services and corresponding flow of consumption expenditure from households to firm for purchase of goods and services produced by firm. It is also known as ‘Nominal flow’.
As seen in the above diagram, the producing sector makes factor payments to households for their factor services and households spend this income on purchase of goods and services produced by the firm.
