How to Define and Explain the Economy to Kids

It is all about making and spending money

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Kids might ask, "What's the economy?" when they hear it discussed on the news. They might hear that the economy is in good shape or bad shape, but they wonder what exactly that means. It can be a difficult question for parents to answer, especially when the parents themselves don't 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.

Provide an Overview

The economy is all about how money is made and spent in a set area—whether 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, we use money to buy presents around the holidays, and food when we get hungry. 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 doing well. Just because the economy is doing well, that doesn't mean that everyone is doing well. But when a majority of the people in an economy aren't stressed about money, then the economy is considered healthy. On the other hand, there are times when many people don't have enough money to buy what they need. The economy is doing badly when this happens. 

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 economy.

A better approach might be to discuss how the economy's ups and downs affect your family and friends personally. 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:

  • A bad economy 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 this good economy, most people can find a job, so they can afford to take their kids on vacation and buy necessities like food and a home.
  • The economy is bad right now, so it's tough for many people to find a job. 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 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.
  • Since the economy is good in our country, we have extra money that we can afford to send to countries with worse economies. We can help families there through the crisis by helping to buy food and build homes.

Watch Your Tongue 

Remember, 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 all this in, so unless you're very sure you're alone, choose your words carefully.

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. You don't want the negatives to seem too devastating or harsh. For example, avoid saying things like "we might lose the house if this economy gets worse" or "I might lose my job because of the economy."

You don't want to shelter your child from your financial life, even if it's less than perfect. But keep the conversations age-appropriate. 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 make financial transactions. Show your child how to earn money with an allowance. Teach them to save it, how to make a budget, and how to save up for big purchases. This 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, get them set up with a savings account. 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.

Games such as Monopoly, Minecraft, and Stardew Valley feature economic systems that allow kids to have fun while seeing how an economy works. The games feature options to buy and sell, and the success of a player depends on their ability to balance short term gains with long-term goals, exercise restraint, and strategize how to make the most of the resources they have on hand. There are many other online games and board games that show kids how to manage money and resources, as well.

Keep It All in Context

The economy is both huge and hugely complicated. As mentioned at the top, 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.