The Flow Of Money

The real estate financing occurs through a process called the flow of the money.

The production of goods and services requires that money be paid for the use of labor, raw materials, management, and capital as illustrated in Figure 2-1. This money is called personal income, and all or some of it may be taxed, spent on goods and services, or saved. That which is saved is usually deposited in financial intermediaries, which, in turn, pump funds back into production.

Figure 2-1 is a simplified model of how savings accumulate to become the reservoir for future loans. Carefully trace this circular flow until you understand that individuals "own" land, labor, capital, and management (the supply components), and businesses need these supply components to produce. Thus, businesses "buy" land, labor, and capital from individuals, thereby giving individuals income in the form of wages, rents, interest, and profits. This personal income is then taxed, spent, or saved. That which is saved becomes capital for borrowing.

Figure 2-1: The Flow of National Economy

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