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December 15, 2018 

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GOVERNMENT POLICIES: Government actions designed to affect economic activity and pursue one or more economic goals. Also called economic policies. The four common types of government policies are: fiscal, monetary, regulatory, and judicial.

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PAYMENT FLOW:

In the circular flow, the transfer of money in payment in exchange for the counter-clockwise physical flow of goods and services. The payment flow is the monetary payment for goods and services received by the household sector from the business sector through product markets and the monetary payment for resource services obtained by the business sector from the household sector through resource markets. The payment flow is usually illustrated as a clockwise flow for a model with the product markets at the top, resource markets at the bottom, household sector at the left, and business sector at the left. The physical flow moves in the opposite direction.
The payment flow, payments made in exchange for goods and services, highlights the essence of the circular flow model. While the physical movement of goods and services is important to the economy, the countering flow of payments provides greater insight into the complexity of the macroeconomy. Revenue collected by the business sector from selling goods is used to pay the services of the factors of production. These factor payments become income which is used by household sector to buy production from the business sector. This completes the circle back to revenue received by the business sector.

Tracking the Money Payments

Envision tagging a dollar bill, like game wardens do wild animals, then tracing its circulation from household sector to business sector to household sector to business sector, over the course of the year. This dollar bill buys production, then pays for resources, then buys more production, then pays for more resources. In the modern U.S. economy, a given dollar bill is likely to circulate through the circular flow about six times, completing one cycle about every two months.

Tracking a dollar bill as it moves through the economy highlights four key segments of the payment flow:

  • Gross domestic product is the payment flow between the business sector and the product markets.

  • Consumption expenditures are the payment flow between the household sector and the product markets.

  • Factor payments are the payment flow between the business sector and the resource markets.

  • National income is the payment flow between the household sector and the resource markets.

Focusing On Payments

Two prime reasons for focusing on the payment flow standout:

  • First, counting dollar bills is a great deal easier than tracking physical goods. Money is a great way to keep score when analyzing the macroeconomy. Tracking only physical goods would literally involve adding apples and oranges. What does it mean to have 10,000 items flowing through product markets if 5,000 of those items are cars and 5,000 are toothpicks? Tracking the flow of payments gives a good idea of the value of the goods produced.

  • Second, unlike the physical flow, the payment flow is very much a continuous flow. The physical flow of cars moves from the business sector to the household sector, where it then essentially stops. The physical flow of labor services moves from the household sector to the business sector, where it then essentially stops.

    In contrast, the payment flow continues to circulate between household and business sectors. The revenue received by the OmniMotors from selling an OmniMotors XL GT 9000 Sports Coupe is used to pay the workers who provide their labor services. These workers then use this income to purchase other goods from the business sector. These other producers then use this revenue to pay other employees. These other employees then buy other production, which is then used to pay other employees. Round and round and round the payment flow goes.

Working Around a Diagram

The Payment Flow
Circular Flow
The circular flow model displayed here is the simplest version of the circular flow model. It contains two sectors. At the far left is the household sector, containing people seeking consumption. At the far right is the business sector doing the production. Two markets are also included. At the top is the product markets that exchange final goods and services, or gross domestic product. At the bottom is the resource markets that exchange the services of the scarce resources. The gray inner ring represents the physical flow. The green outer ring represents the payment flow moving in the opposite direction.
  • Through the Product Markets: Beginning with the product markets at the top of the circular flow and moving counter-clockwise, physical production moves from the business sector to the household sector. Payment for this production flows in the opposite direction, clockwise, from the household sector through the product markets to the business sector. Payments made by the household sector for the goods and services received is consumption expenditures. The revenue received by the business sector in exchange for the production it sells is gross domestic product.

    Suppose, for example, that Alicia Hyfield buys a tasty Super Deluxe TexMex Gargantuan Taco, this taco "flows" from Waldo's TexMex Taco World to Alicia, from the business sector to the household sector. Moving in the opposite direction is the payment for this taco, the money that Alicia gives up to buy the taco. When received by the Waldo's TexMex Taco World, this revenue is part of gross domestic product. This payment flows from Alicia to the Waldo's Taco World, from the household sector to the business sector.


  • Through the Resource Markets: A similar story can be told for the resource markets at the bottom of the diagram. Again, flowing counter-clockwise, the business sector buys factor services from the household sector. The payment for these services flows clockwise from the business sector through the resource markets to the household sector. The payments made by the business sector for these factor services are aptly termed factor payments. The revenue received by the household sector for providing these services is termed national income.

    Suppose that Edgar Millbottom provides his labor services to Waldo's TexMex Taco World. His services "flow" from the household sector through the resource markets and end up with Waldo's TexMex Taco World in the business sector, where it is used in the production of an Waldo's Super Deluxe TexMex Gargantuan Taco. Moving in the opposite direction of this physical flow is the payment for Edgar's labor services, the money Waldo pays Edgar. When this payment leaves Waldo's Taco World, it is a factor payment. When Edgar receives this payment, it is part of national income. This payment flows from Waldo's Taco World to Edgar, from the household sector to the business sector.

A Word About the Physical Flow

The payment flow is countered by the physical flow of goods, services, and resources that moves in the opposite direction. The physical flow is the transfer of goods and services from the business sector to the household sector and the transfer of resource services from the household sector to the business sector. This is usually represented as a counter-clockwise movement.

<= PATERNALISMPEAK =>


Recommended Citation:

PAYMENT FLOW, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 15, 2018].


Check Out These Related Terms...

     | circular flow | payment flow | two-sector, two-market circular flow | two-sector, three-market circular flow | three-sector, three-market circular flow | four-sector, three-market circular flow |


Or For A Little Background...

     | macroeconomic markets | product markets | resource markets | macroeconomic sectors | household sector | business sector | production | consumption | model | market | exchange | economy |


And For Further Study...

     | business cycles | macroeconomic goals | macroeconomic problems | macroeconomic theories | paper economy |


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