H2 Econs Tuition: Circular Flow Model

January30, 2025
by admin

H2 Econs Tuition: Circular Flow Model and building an understanding through the TET way – a class summary.

H2 Econs Tuition: Circular Flow Model

H2 Econs Tuition: Circular Flow Model (Origins)

Mr Koh introduced the circular flow model, developed by John Maynard Keynes, highlighting its simplicity and the importance of questioning its assumptions. He explained that the model illustrates the multiplier process, while the Aggregate Demand-Aggregate Supply (AD-AS) model assesses internal economic performance. Both models are instrumental in determining the equilibrium level of real GDP, although they serve distinct purposes.

Mr Koh elaborated on the interactions between households and firms, using the analogy of Robinson Crusoe and Friday to illustrate the exchange of factors of production for factor income. He emphasised that households provide capital, enterprise, land, and labor to firms, which in turn compensates them with wages, profits, interest and rental income. This continuous cycle of interaction is essential for economic functioning, as firms convert the provided factors into productive outputs.

H2 Econs Tuition: Circular Flow Model (Interactions)

The discussion progressed to the Keynesian economic model, where Mr Koh outlined three critical assumptions: households spend all their income, income equals the value of output, and households pay an amount equal to the value of output produced. He emphasised that these assumptions create an identity where income, output, and expenditure are equal, which is vital for understanding the interchangeable relationship between income and GDP (e.g. how we can deduct net factor income from GDP to obtain GNP). Mr Koh also addressed the financial behavior of households, discussing the significance of saving in banks, the implications of import spending, and the impact of taxes on disposable income.

H2 Econs Tuition: Circular Flow Model (Implications)

Mr Koh further explored the four-sector economy, which includes households, firms, government, and the external sector, while excluding banks due to their intermediary role. He illustrated the circular flow model with arrows representing consumption, investment, government spending, and exports flowing into firms, and consumption, savings, taxes, and imports flowing out from households. The session included a discussion on the marginal propensity to consume and save, particularly in the context of Singapore’s economic landscape. Mr Koh concluded by emphasising the importance of understanding these dynamics for analysing national income equilibrium and the multiplier effect, particularly in relation to historical economic events like the Great Depression and the New Deal.

H2 Econs Tuition: Circular Flow Model

Conclusion

Finally, students were taught TET’s key parachute concepts for this chapter – DEE and CCA structure. They learnt how CCA could be applied to almost all essay question types assessed in school Preliminary exams and the A Levels, and were encouraged to use TET’s online essay planner to attempt their homework.

To stay ahead of your Economics classes in school, join us in picking up your unfair advantage – the TET’s Parachute Concept approach has been tried and tested for more than a decade. Sign up for a trial class now 🙂

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