How To Define and Explain the Economy to Kids

The economy is talked about regularly both in the news and also often at home between parents or guardians. As kids hear things like "the economy is in good shape" or "the economy is isn't looking great right now," kids may start to get curious about what the economy really is and why it matters.

It can be difficult for parents, guardians, and even teachers to explain what the economy is, especially when you yourself might not know what to make of the day-to-day economic news. Luckily, you don't have to be an expert economist to give children a basic understanding of the economy. With these tips and examples, talking about the economy with your kids may be even easier than you thought.

Provide an Overview

The economy is made of three things: all of the people making things, all of the people using things, and all of the buying and selling of those things. If one country doesn’t make very much and doesn’t sell very much, everyone has less stuff and less money—that’s when people see the economy as “bad.” 

This definition can be applied when we're talking about a local economy, a national economy, or a global economy. That includes the amount of money moving around the economy, where (or with whom) the money is accumulating, and the trends that influence how money moves around an economy.

Try starting with the basics, like how the economy is made up of buyers and sellers. Then, explain how each of us is both a buyer and a seller; it just depends on the circumstance at the time. For example, adults use money to buy presents around the holidays, and food when we need more. On the other hand, we sell things when we need more money. That can mean selling a car or a home. It can also mean selling our time or knowledge, like when a company needs work done or when someone is willing to pay for advice.

There are times when a lot of people have more money than they need to survive. When this happens, the economy is technically doing well. When a majority of the people in an economy aren't stressed about money, then the economy is considered healthy. But it's important to note to your kids that just because the economy is doing well, that doesn't mean that everyone is doing well.

Don't Get Too Technical

Giving kids a detailed, textbook definition of "economy" is likely to make their eyes glaze over. Even adults might have to stifle a yawn if they were forced to sit down for a by-the-book explanation of the economy.

A better approach might be to discuss how the economy's ups and downs impact your family and friends directly. You don't want to get too technical, nor do you want to sound overly optimistic or pessimistic, but there are some examples you can give kids about how economic news takes effect in the real world:

• When the economy is in a bad state, it means we shouldn't spend too much money right now. We should only buy the things we need and try to make our money last as long as we can until the economy gets better. 
• In today's economy, most people can find a job, which may make them more able to afford to take their kids on vacation and buy necessities like food and a home.
• It can sometimes be challenging to find work. We need to sympathize with those who are struggling. They are trying their hardest to work, but they might not get a job until the economy turns around.
• The price of something that we want to buy is going up, so we have to decide whether we want to buy less of it or wait for the price to come back down.
• The United States can send money to countries with worse economies. We also can help families there through the crisis by helping to buy food and build homes.

Watch Your Tongue 

Remember, in most cases, it's not just what you say to your child that'll shape their understanding of the economy, but what they overhear when adults are talking to each other. Kids take it all in, so it's important to choose your words carefully when speaking about the economy, and all personal finance topics in general.

If you aren't careful about the way you discuss the economy, you could end up teaching your child that the economy is synonymous with stress. You're balancing the good with the bad in the things you say to them directly, so make sure the same applies to your private conversations.

When talking about money with kids, remember that children don't have as much experience as adults. So while the economy may go through a rough patch, and you may lose your job, you know that the economy goes through cycles, and you will get another job—make sure your child also understands that economic situations aren't permanent.

Make It Real 

The best way for kids to grasp the meaning of the economy is to let them see and understand financial transactions. When you feel as though your kid is ready, show your child how to earn money with an allowance. Teach them how to save it, make a budget, and save up for big purchases. That helps them learn the importance of economic decision making well before they get their first job and start learning about economics in the real world.

Once your child has an allowance, you may want to get them set up with a savings account, with the most common option being custodial accounts. They'll need an account eventually, and it's never too early to start saving. They'll feel excited to do something as "grown-up" as going to the bank to set up the account. With the account opened, encourage them to set savings goals, and help them set up a realistic plan for reaching those goals.

Keep It All in Context

The economy is as massively complicated as it is massive in general. As mentioned, most adults don't even fully understand all the factors moving an economy on a day-to-day basis. Attempting to hide your gaps in knowledge or oversimplifying a concept could end up doing a disservice to your child.

Instead, cushion all conversations about the economy with comments about how there's always more you can learn about the economy—but that good economists strive to have a balanced background of knowledge. Adults need to follow the economy and have a basic understanding of how it works, but it isn't the only factor affecting society.

This presents an opportunity to bring up the importance of charity and empathy. Talk to your child about ways they'd like to see the world improve, and help them find ways they could donate a little of their allowance to contribute to that good cause.

Better yet, see if there's a way your child can use their resources to directly help someone. Maybe they could buy and prepare food for a nearby homeless community or organize their classmates to help clean up a park. These acts help children learn that money and resources are useful for buying and selling things for personal benefit, but they can also be used to help uplift our neighbors—and improve the economy in the process.

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