One example of the difference between real and nominal cash flow is the cost of electricity, which represents a liability, or a source of outflow of cash, for a factory. To project nominal cash flow, the factory's accountants will examine trends in inflation throughout the economy to estimate the unit price of electricity five years in the future. Real flow is the exchange of goods and services between household and firms whereas money flow is the monetary exchange between two sectors. In real flow household sector supplies raw material, land, labour, capital and enterprise to firms and in return firms sector provides finished goods and services to household sector. The money that is saved after all the expenses have been deducted is considered as an income. Money and income are two different words that refer to two different things. Money is considered as an intangible concept that is only visible in numbers. Income is the amount of money that an individual has managed to save following their spendings. Flow of factor payments by producer sector to the household sector or flow of money from household sector to producer sector on account of the purchase of goods and services for consumption are examples of money flows. Real flow refers to the flow of goods and services across different sectors of the economy.

Basically, there are two types of circular flow of income – Real Flow and Money Flow. The biggest difference between real flow and money flow is that in case of real flow, exchange of goods and services takes place among various sectors of the economy, but when we talk about money flow, the monetary exchange between the two sectors exists.

A two-sector economy is one where only two sectors exist, i.e. the household sector, which represents the consumer group and producer sector which represents firms.

What is Circular Flow of Income?

The ongoing movement or exchange of goods and services and money across various sectors of the economy is termed as Circular Flow of Income:

Principles of Circular Flow of Income

In the process of exchange, the amount received by the seller is equal to the amount spent by the buyer.
In one direction, there is the flow of goods and services, while in the opposite direction there is a flow of money, with respect to the payments for availing the goods and services, which results in a circular flow.

In this post, we will talk about all the important differences between real flow and money flow, using diagram and examples.

Content: Real Flow Vs Money Flow

Comparison Chart

Basis for Comparison	Real Flow	Money Flow
Meaning	Real Flow implies the movement of factors services and a corresponding flow of goods and services amidst the various sectors of the economy.	Money flow implies the cycle of payment in the monetary form, from firms to households and a corresponding monetary payment from households to the firm.
Flow
Alternative Name	Physical Flow	Nominal Flow
Movement	Clockwise	Anticlockwise
Involves	Factors of production flows from households to firms. Concurrently, goods and services are supplied by the firms to households.	Remuneration is provided to households by the firms for factor services. Concurrently, goods and services are purchased from the business sector by the households.
Use of money	Exchange of goods and services without the use of money.	Exchange of goods and services by using money.

Definition of Real Flow

Real flow is when goods and services move from one sector of the economy to another sector. Real flow is named so because there is the physical transfer of goods and services amidst the two sectors, i.e. households and firms. Hence, it is also termed as product flow or physical flow.

In real flow, the household sector being the owners of the inputs supply factor services in the form of raw material, land, labour, capital and enterprise to the firm, and in exchange, the firm provides goods and services to meet the demand of the households. Therefore, real flow is in the form of:

The household sector provides factors of production to the producer sector.
The actual flow of final goods and services from producers (firms) to consumers (households).

Further, it acts as a reward for the productive services offered by the households to the firms. And in this way, money does not play any role in real flow, due which the difficulties of barter exchange may take place.

As you can see in the figure shown above, the two arrows represent real flows. Moreover, and the sectors are interdependent on one another.

Also Read: Difference Between Stock and Flow

Definition of Money Flow

In money flow, the household sector receives monetary payments in the form of rent, wages and salaries, interest and profit, for the factor services offered by them to the firm. In return, the household sector, i.e. the consumers spend the money received by them on buying goods and services produced by the firms, so as to satisfy their wants.

In this way, money flows back to the firms, in the form of consumption expenditure on the goods and services.

The basic concept behind money flow is that goods and services, and factor services are valued in monetary terms in a modern economy. Therefore, all the payments made by the firms to the households for the factors of production provided and by the households to the firm for the goods and services purchased, are made in the legal tender of the country.

In a nutshell,

Households represent consumers of goods and services, which also owns the factors of production.
Firms represent the producer group, who produce the goods and services, and for this, they require inputs and so they hire factors of production from the household sector.
Therefore, firstly money flows from firms to households in the form of factor payments for the factors of production provided by the household sector and then the money flows from households to the firms, in the form of consumption expenditure.

Hence, in a money flow, money acts as a medium of exchange, which facilitates transactions between the two sectors. So, it is free from the difficulties that arise in barter exchange. Alternately, it is called as income flow or nominal flow.
As you can see in the figure, the two arrows indicate the money flow between the two sectors in the economy.

Key Differences Between Real Flow and Money Flow

Let us understand the difference between real flow and money flow, in the elaborated form:

Real flow involves the flow of factor services from the owners (households) to producers (firms) and a corresponding flow of goods and services from the producers (firms) to consumers (households). Conversely, we all know that flow of factor services generates factor income, i.e. rent, wages, interest and profit, from the firm to the households, and a corresponding flow of consumption expenditure takes place from the household to the firm.
Real flow is also termed as physical flow because in real flow there is an actual movement of goods and services between households and firms. On the contrary, money flow is alternately known as nominal flow, because the transactions take place, using money as a medium of exchange.
In case of real flow, the movement of factor services, and goods and services, takes place in a clockwise direction, but in case of money flow, the movement is reversed, and so the flow takes place in an anticlockwise direction.
Real flows involve the flow of factors of production, i.e land, labour, capital and enterprise and in turn, the firms supply final goods and services to the consumers so as to satisfy their demand. As against, in case of money flow remuneration is provided to households by the firms for factor services in the form of rent for land, wages for labour, interest for capital employed, and profit for enterprise and in return, consumers spend the money to buy goods and services from the firms.
In a money flow, money is used as a medium of exchange, which facilitates transactions, by valuing them in monetary terms. In contrast, in real flow money is not used as a medium of exchange, rather physical flow of factors of production and goods and services takes place. Therefore,

Explain The Difference Between Real Flow And Money Flow