The real economy concerns the flow of goods and services (like oil, bread and labor hours), compared with the monetary sector that covers the circulation of money and other documents that represent ownership or claims to ownership of real sector goods and services. Most economics textbooks will treat the monetary sector as a "shadow" of the real sector; apples traded for oranges, labor for commodities, with real sector value determined by an actor tastes and preferences and the cost of production. The monetary sector only plays the part of influencing the price level, so in this simplified example the role of the supply and demand is generally limited to the quantity theory of money). This is the neoclassical school of economics where the money supply is determined exogenously by a central bank (without effect on real output and employment).
This division of the whole economy into real and monetary sector ("classical dichotomy") comes from the neoclassical economic theory. On the other hand, both Keynesian and Marxist economic theory reject the classical dichotomy.
The real sector is sensitive to the effect liquidity has on asset prices, for example if the market is saturated and asset prices collapse. In the real sector this uncertainty can mean a slowdown in aggregate demand (and in the monetary sector, an increase in the demand for money).
A reader often encounters the term "real economy" in the economic literature and discourse. Real economy as a term is used to distinguish the financial aspect of the economy.. Awareness about the real economy has grown considerably as financialization - “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” - has emerged as a dominant phenomenon.
Higher interest rates in the 1980s and 1990s reduced cash flows and decreased asset prices in several OECD countries especially as declining prices in real estate and loan losses reduced equity in the banking sector lending decreased. As real estate values declined sharply in the Northeastern United States lending also decreased.
- Reintroducing Macroeconomics. M. E. Sharpe. 2007. pp. 134–42. ISBN 0765614502. Retrieved 8 August 2019.
- Rousseas, Stephen (2005). Post Keynesian Monetary Economics. Routledge. p. 19. ISBN 1315486156. Retrieved 8 August 2019.
- Batko, M. (2013). The Real Economy and the Finance Economy. Munich: BookRix
- Krippner, G. (2005). “The financialization of the American economy,” Socio-Economic Review, 3, 173-208
- Holmstrom, Bengt (1997). "Financial Intermediation, Loanable Funds, and the Real Sector". The Quarterly Journal of Economics. 112 (3): 663–691. JSTOR 2951252.
1. Brender, A., Pisani, F. and Gagna, E. (2015). Money, Finance, and the Real Economy: What Has Gone Wrong? Centre for European Policy Studies, Brussels.
2. Christensen, Alex (2015). "Where do financial markets end and the 'real economy' begin? Globalriskinsights.com.
3. Farooq, Mohammad Omar (2017). "Real Economy: Conceptualization and Dynamics," SSRN.
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