Official Payments

• Compensation of Employees: The official measure of wages earned by the household sector for supplying labor services. Compensation of employees is far and away the largest of the five factor payments, typically running about 70 percent of total factor payments. It includes standard wages and salaries paid directly to employees, as well as fringe benefits paid on behalf of employees to third parties.


• Net Interest: The official measure of interest earned by the household sector for supplying capital services. Net interest is usually less than 10 percent of total factor payments, typically in the 6 to 8 percent range. It is revenue generated from borrowed funds but is considered payment for the productive services of capital, because capital is typically purchased with borrowed funds.


• Rental Income of Persons: The official measure of rent earned by the household sector for supplying land and related services. Rental income of persons is typically the smallest of the five factor payment categories, usually less than 5 percent of total factor payments. It includes payments for the use of land, natural resources, and capital goods attached to the land.


• Corporate Profits: The total accounting profits received by corporations, which is the official measure of profit earned by the household sector for supplying entrepreneurship services through corporations. Corporate profits is the second largest factor payment category, usually coming in around 20 to 25 percent of total factor payments.


• Proprietors' Income: The excess of revenue over explicit production cost of owner-operated businesses and includes payments to all factors of production--labor, capital, land, and entrepreneurship. Proprietors' income is usually less than 10 percent of total factor payments, typically falling in the 7 to 10 percent range.

The Circular Flow

The Circular Flow

A basic representation of the circular flow is displayed to the right. The components of this model are the four macroeconomic sectors--household, business, government and foreign--and the three macroeconomic markets--product, resource, and financial.

The household sector at the far left contains the consuming population of the economy who also own all resources. The business sector at the far right includes all of the producers. The government sector is positioned in the middle of the diagram and the foreign sector is at the very top.

The product markets near the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction. The financial markets located just above the resource markets divert saving from the household sector to business and government borrowing.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

Factor payments are the flow between the business sector and the resource markets. In particular, the business sector uses the revenue it receives from the sale of gross domestic product to pay for the services of the factors of production.

On To Income

The following equation summarizes the connection between national income and factor payments:

National Income

=

Factor Payments

=

Wages + Interest + Rent + Profit + Proprietors' Income