Presented by: PATRICIA ANN W. MAGALONA 2-DA-1 FACTOR PAYMENTS
It is the payments made to scarce resources or the factors of production of land, labor, capital, and entrepreneurship. In return for productive services. Factor payments are frequently categorized according to the services of the productive resource being rewarded. Wages are paid for the services of labor; interest is the payment for the services of capital, rent is the services for land, and profit is the factor payment to entrepreneurship. FACTOR PAYMENTS:
Factor payments show up in the circular flow model of the macroeconomy as payments made by the business sector for the factor services purchased from the household sector through the factor or resource markets. The source of the revenue used by the business sector for factor payments is the sale of output through the product markets. Factor payments are essentially the production cost for the business sector. Factor payments are also the income, specifically, national income, of the household sector.
The official factor payment entries in the National Income and Product Accounts maintained by the Bureau of Economic analysis. Compensation of Employees(wages) - 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. OFFICIAL PAYMENTS
Net Interest(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(rent) - 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(profit) - The total accounting profits received bycorporations, 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.
While the first four entries might seem to be all inclusive, proprietors' income is needed because proprietorships (partnerships) frequently fail to separately track implicit wage, interest, rent, and profit factor payments. In particular, small owner-operated firms often calculate net income by deducting explicit operating cost from revenue, thus ignoring any implicit payments for labor, capital, land or entrepreneurship supplied by the proprietor as such, this proprietors' income includes usually wages, rent, interest, and profit.
The Circular Flow
The role that factor payments play in the macroeconomy can be illustrated by the circular flow model. The circular flow captures the continuous movement of production, consumption, income, and factor payments between producers and consumers. 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. ________________________________________________
PROJECT IN SOCIAL SCIENCE 7 (FACTOR PAYMENTS) PRESENTED BY: PATRICIA ANN W. MAGALONA 2-DA-1 PASSED TO: PROF. TESSIE SAGADRACA