For Parents

How to Explain How the Economy Works To Your Kids

Where to start?! Here’s how to break down how the economy works for your kids and teach the basics.


Did you know that only 21 states in the U.S. require high school students to take a course in personal finance?

You’re probably thinking, ‘What does personal finance have to do with explaining the economy to my kids?’ Well, understanding the economy starts with understanding personal finance, which is shockingly not a given in our educational system.

But don’t worry; whether you’re a finance guru or someone still figuring it out, this guide will help you break down the complex world of the economy into bite-sized pieces your kids can digest.

Are you ready to give your child a head start in understanding the economic world around us? Let’s get started.

Understanding Basic Economic Concepts

Let’s explore basic economic concepts, starting with the pillars that keep it sturdy: supply and demand. These two forces drive the whole economy and are pretty easy to understand. When there’s a lot of something (like apples), that’s high supply. If few people want apples, that’s low demand. When supply is high and demand is low, the price of apples falls. It’s a clearance sale!

Flip it around and imagine there’s a new toy everyone wants (high demand), but there aren’t many available (low supply). The price skyrockets. It’s auction time!

Next, let’s talk money. It’s not just paper and coins. It’s a tool for exchange. Long ago, people bartered — trading goods directly. But what if you’ve got chickens and want a cow? Who’s a cow and wants chickens? Money solves this by acting as a middleman.

Lastly, there’s saving and investing. Saving is setting money aside for later. Investing is using your money to make more money, like buying stocks or starting a business.

Now you’re armed with the basics! Ready to start your economic adventure with your kids?

Explaining Money and Its Value

Diving into the concept of money and its value, it’s crucial to understand that money, in essence, only holds value because we, as a society, agree it does. It’s a medium of exchange, a measure of goods and services, and a store of value. But how can you illustrate this to your kids?

Firstly, let’s simplify it. Money’s value comes from the belief that it can be exchanged for something you want or need. It’s like a promise – a promise that you can trade it for goods or services.

Try these exercises with your kids:

  • Ask them what they’d exchange for a toy they want. Is it chores, good grades, or something else?
  • Let them earn and save their ‘money’ (chore points, grades, etc.), and then ‘buy’ something with it.
  • Discuss how they felt about ‘earning’, ‘saving’, and ‘spending’ their money.

The Principle of Supply and Demand

Now that your kids understand the value of money, it’s time to introduce the principle of supply and demand. This principle is the backbone of any economy and helps determine the prices of goods and services.

Imagine a popular toy that every kid wants. If the toy company only makes a few, the demand is high, but the supply is low. This scarcity can drive up the price. However, the supply is high if the company makes millions of these toys. Even if the demand is still high, there’s enough for everyone so that the price might decrease.

The same rule applies to things like fruits and veggies. Prices go up if there’s a bad harvest and fewer apples are available. But if there’s a bumper crop, prices can drop because there’s plenty to go around.

That’s the principle of supply and demand in a nutshell. It’s a simple concept, but understanding it can help your kids make sense of why things cost what they do. It’s a crucial step in their financial education.

With this understanding, they’re well on their way to becoming savvy consumers.

Breaking Down Taxes and Government Spending

Shifting gears a bit, it’s important to tackle taxes and government spending, another key component in understanding the economy.

You see, taxes are payments that adults make to the government. They’re like contributions to a large pot used to fund various services and projects that benefit everyone.

Here are three reasons why understanding taxes and government spending is vital:

  • It’s part of our civic duty – everyone chips in to make sure our community thrives.
  • It helps us understand where our money goes – transparency is key in a democracy.
  • It teaches us about responsibility – just as we manage our personal spending, so does the government.

Government spending, on the other hand, is how the money from that large pot is used. This could be for building roads and schools or even paying for healthcare services. Just like in our homes, the government must budget their spending to make sure the most important things are taken care of first.

Discussing Inflation and Its Effects

Let’s tackle another essential economic concept: inflation and its effects on our daily lives. Imagine if your favorite ice cream suddenly costs double. That’s inflation – when the average price of goods and services rises over time. It’s like a sneaky thief that reduces the purchasing power of money.

Now, you’re probably wondering why inflation happens. It’s usually because there’s too much money chasing too few goods. When demand outpaces supply, prices go up. Governments try to control inflation by adjusting interest rates and managing the money supply.

Inflation isn’t always bad, though. A little can encourage spending, which helps the economy grow. But too much, well, that’s when we get into trouble. It can lead to increased costs of living and decreased savings. It’s important to understand that while we can’t stop inflation, we can plan and prepare for it.

Helping your kids understand inflation now will equip them to make smarter financial decisions in the future. It’s not just an economic term; it’s a life lesson. Remember, knowledge is power, and with a little education, we can all be better prepared for the economic ups and downs.

Economics Is Big – Start Small

Congratulations! You’ve just embarked on a crucial journey with your child, navigating the intricate yet intriguing world of economics. Think of it as planting a financial seed today that will grow into a prosperous tree tomorrow.

Your efforts can equip them with the tools to make informed decisions, fostering a healthy financial future. Remember, every big concept started small, and you’ve taken the first steps to light up the economic world for them.

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About the Author

David McCurrach

David McCurrach is the founder of Kids' Money. Following a career working in finance for several banks and credit unions, David started Kids' Money in 1995 and has since published three books on kids' financial literacy and allowance programs.

Last updated on: July 8, 2024