Introduction

After you have worked through this section of the learning unit, you should be able to:

  • distinguish between real flows and nominal (monetary) flows
  • identify the real and nominal flows through the factor market and the goods market

Real flows refer to the flow of real things such as goods and services or the factors of production, while nominal flows refer to the flow of money in the form of money income (wages and salaries, interest, rent and profits) and spending on goods and services.

In the factor market, the real flow is the flow of the factors of production – the quantity of labour, capital, land and entrepreneurship – from households to firms.

The monetary flow is the flow of income in terms of money from firms to households – in other words, the amount that is paid in wages and salaries, interest, rent and profits.

In the goods market, the real flow is the flow of goods and services from firms to households.

The monetary flow is the flow of spending (payment) by households to firms for goods and services.

Activity

Do the following activities on the real and monetary flows:

Which one of the following is a real flow in the goods market?




The flow of goods and services from firms to households indeed is a real flow and occurs through the goods market.

The spending flow on goods and services from households to firms is a nominal (monetary) flow.

The flow of the factors of production from households to firms is a real flow through the factor market.

Think again.

The flow of goods and services from firms to households is a real flow and occurs through the goods market.

The spending flow on goods and services from households to firms is a nominal (monetary) flow.

The flow of the factors of production from households to firms is a real flow through the factor market.

Which one of the following is a monetary flow in the factor market?




This is indeed the case.

The income flow from firms to household is a nominal (monetary) flow through the factor market.

The flow of factors of production from households to firms is a real flow through the factor market.

The spending flow on goods and services from households to firms is a nominal (monetary) flow through the goods market.

Think again.

The flow of factors of production from households to firms is a real flow through the factor market.

The income flow from firms to household is a nominal (monetary) flow through the factor market.

The spending flow on goods and services from households to firms is a nominal (monetary) flow through the goods market.

Think again.

The spending flow on goods and services from households to firms is a nominal (monetary) flow through the goods market.

The flow of factors of production from households to firms is a real flow through the factor market.

The income flow from firms to household is a nominal (monetary) flow through the factor market.

Indicate whether the following statement is true or false:

If more factors of production flow to the firms, then the income flow to households will increase.



The statement is indeed true.

As households make more factors of production available, their income from the factors of production increases.

Think again.

As households make more factors of production available, their income from the factors of production increases.