Without an understanding of how their personal money habits connect to the broader economy, it’s much harder for kids to grasp where control of funds really is and why financial events occur. At a minimum, you should cover these seven essential economic concepts with your kids.
- Basic principles of supply and demand drive the economy.
When you have a lot of something or demand is low, prices usually stay pretty reasonable and might even be downright cheap. As soon as an item becomes rare or a lot of people want it, however, sellers usually hike up the price, knowing that individuals want what the sellers have to offer. In this way, it’s consumers that ultimately shape the market and control what the economy is doing.
- Experts look at how much people produce or earn to determine how big an economy is.
Government leaders often want to know how their and other economies are doing, as it helps them know whether to make adjustments to economic policies. Getting the status of an economy requires a basic way to measure decline, stability or growth. Most economists look at the value of whatever a region produces—its gross domestic product (GDP)—to make a conclusion about the area’s economic strength. Sometimes, economists look at how much everyone is earning collectively and call that GDP instead, but either way, comparing GDP rates from one year to another can show whether the economy is worsening or getting better.
- Goods will cost more in the future than they do now.
Due to multiple factors, including changes to supply and demand, the cost of most goods tends to go up over time. This is known as inflation. Inflation can be hard to predict, but central banks try to keep inflation fairly low, mainly by tweaking interest rates. Inflation affects not only basic things like food and rent, but also other things that affect kids, like the cost of going to college or getting involved in a sports program. Without good planning and saving, inflation can mean you don’t have enough money to pay for what you need as you get older.
- Interest, growth and inflation are all connected.
Interest is the amount of money you charge someone when they borrow from you in some way—it’s money you earn for taking on some risk and letting them use your funds. When interest rates drop, there’s usually some economic growth because consumers spend more. When there is too much growth, however, inflation can increase fast. A constant challenge economists and central banks have, therefore, is to set interest rates so that growth and inflation are balanced.
- Government leaders can help stabilize economies.
The rules of supply and demand apply to governments. If the government spends a lot, it creates an increase in demand for whatever it is that the government buys. That increase in demand can result in increases to both inflation and growth. By spending more when inflation and growth are low and tightening their wallets during periods of high inflation and growth, governments play a big part in keeping an economy stable.
- It is normal for economies to have good and bad periods.
Even though government leaders and economists are always trying to keep the economy from shifting too much, some change is normal and expected. When the economy isn’t doing so well, it’s known as a recession. People often struggle financially and might have trouble keeping or finding work in these times. When the economy is growing, it is known as an expansion. People usually enjoy being able to work, spend and invest.
- Opportunity cost is part of regular buying or business and can drive company decisions.
Whenever you buy something, you give up something else you could have purchased with your money. This is known as opportunity cost. The same thing happens in business. When companies are presented with different opportunities, they have to weigh factors like available resources and earnings potential to decide whether to take the offer or pass. What they decide has a big influence on their stability and, therefore, how solid the economy is overall.