The Circular Flow of Money
Chart 2


A Credit money-flow is a transfer of money with expectation of repayment.

The IDMF Primary Credit concept fills the NIPA "financial gap" between saving and investment.
Primary Financial Saving is a money-flow "detour" from the main circular flow of income and spending.
Primary Borrowing is money borrowed (or obtained as an equity investment) to actually finance GDP spending. It ends the Financial Saving detour by returning the money to the main circular flow of income and spending.

The Credit Market is a conceptual abstraction ("super-giant bank") that accepts all Primary Financial Saving and finances all Primary Borrowing. It services the saving/investment money-flow detour, and nets out intermediate ("pass-through") credit flows -- such as when General Motors issues bonds to finance consumer car loans, or a local store borrows from a bank to finance its "book credit" to customers, or an individual investor borrows from a stock broker to buy newly-issued stock "on margin." (These "pass-through" credit flows are netted out very much the way intermediate income/output flows are netted out by the NIPA "value added" concept.)

The National Credit Balance between total Primary Financial Saving and total Primary Borrowing is the main determinant of interest rates -- the prices of credit -- because interest rates respond to the market balance between supply and demand like other relatively competitive prices.


To the Circular Flow diagram introduction
To the complete diagram that includes Monetary Authority and Money Inventories (M1).
To the previous step that excludes Credit Market and Primary Credit flows.

Last revised: September 3, 1999
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