What is economics? An inquiry into the nature and causes of the wealth of nations? The task of managing a household? The study of man in the ordinary business of life? When theorists and philosophers through the ages have offered very different definitions, how are parents meant to define economics for kids when they ask?
Related: Ways to teach kids about money
Your children might well be wondering about the economy, right now. The current cost of living crisis means the state of the economy is a hot topic – hearing adults say things like “the economy’s not looking great right now” may prompt them to question you about it.
Thankfully, you don’t have to be an expert to explain economics in terms your kids and teens will understand. To help you, we’ve put together a starter guide. Read on for an economy definition for kids, economics basics to teach them, fun facts, and more.
Talking to your kids about the economy
Economics is what makes the world go round. All of us participate in an economy. Unless you’re a hermit living alone on a desert island, we all contribute to our economy wherever we live.
Before getting into definitions, make sure your kids understand that when people talk about ‘the economy,’ they usually mean the economy of the country they live in. No two economies are the same. Each is created from the resources it has, its culture, laws, history and geography.
An economy definition for kids
To avoid confusing your kids it’s better to steer clear of textbook definitions of an economy. Let’s face it, those can make an adult’s eyes glaze over. Try giving an overview instead.
In simple terms, an economy is made of up three things:
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People making stuff
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People using stuff
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People buying and selling stuff.
To buy and sell stuff people use money. So when you’re talking about an economy, you’re talking about how much money is moving around, where the money’s going and what’s causing the money to move around.
We’re all buyers and sellers. It just depends on our circumstances at the time. For example, we buy food we can’t grow ourselves. We sell things we can grow or make, like flowers or clothes. We also sometimes sell things we don’t want anymore, like a car or house. And we might sell our services to people who need them and will pay, like babysitting, or dog-walking services.
Basic economics terms and definitions
Goods and services are fundamental to an economy. Make sure your children understand the difference between the two. In basic terms:
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Goods are physical objects (cars, food, clothes, houses)
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Services are actions (teaching, babysitting, car washing)
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Both goods and services can be bought and sold.
When you’re sure your kids have grasped the basics, move on to other definitions:
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The study of an economy is called economics
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Someone who studies economics is called an economist
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Being economical means you’re being sparing or careful with something. (From peanut butter to money, or even the truth).
Don’t get too technical, keep things simple
To explain to your kids what it means when people say things like, ‘the economy’s not looking great right now’ you’ll want to give more detail. The trouble is, economics can be complicated. Even adults can struggle to understand it.
It’s best to keep your explanations as simple as possible. Try something like this:
There are bad economies and good economies. A good economy is one where there are lots of jobs that pay people well and businesses are making money. In a bad economy, people lose their jobs and businesses close down.
But just because an economy is said to be good, doesn’t mean everyone is doing well and has enough money to live on. And even if an economy is described as bad, not everyone is doing badly.
Keep it real and give kids examples they can relate to
To help your kids understand how an economy’s ups and downs actually impacts people, use real world examples.
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If an economy is weak or bad, prices go up. So we shouldn’t spend too much money. Until the economy starts growing stronger again we should only buy what we really need. That way, the money we have will last longer.
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When an economy is strong, or good, there are lots of jobs available for people. If people are able to earn money and make a good living, they can afford to pay for their needs, like food and a home. But they’ll also be able to buy things they want too, like vacations.
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It’s not always easy for people to find work when an economy is bad. Businesses close down and there aren’t many jobs available. We should remember to sympathise with people who aren’t as fortunate as us. They might not be able to get a job until the economy improves. We can help other families by donating to food banks, for example.
Try to avoid teaching your children that anything to do with the economy causes stress. Research shows 71% of kids are worried about the cost of living crisis. Reassure them that economic effects on families, like job loss, may not be permanent. The economy goes through cycles.
Types of economics to explain to kids
There are two types of economics: microeconomics and macroeconomics. They sound complicated, but the difference is pretty straightforward.
Want an easy way for your kids to remember which is which? Micro means small and macro means large. Macroeconomics looks at the big picture.
Microeconomics
Microeconomics studies the way individuals, firms and households make decisions. It looks at how the market is divided by supply and demand of goods, as well as their cost. The study of microeconomics helps explain decisions humans make. Why someone buys one product over another, for example.
Macroeconomics
Macroeconomics looks at the bigger picture. It takes a larger community, like a country, or nation, and studies its trade, unemployment figures, inflation and interest rates. It helps explain recession, growth and depression.
Types of economies to explain to kids
As we said earlier, no two economies are the same. But they can usually be categorised as one type or another.
Here are some of the different types of economies.
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Traditional — based on bartering, trading and farming. This type of economy is called traditional because things are done the same way they were done in the past. If you live in a traditional economy and your father is a farmer, you’re likely to become a farmer too.
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Market — based on supply and demand. People and companies can buy whatever products they want and make whatever products they want. It’s sometimes called a ‘free market’ because the government doesn’t control it.
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Command or planned — the government controls this type of economy. It decides what goods are made, the price they’ll sell for and who gets the profit. In command economies, the government owns most major industries.
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Mixed — a combination of a market and command economy. In a mixed economy the government owns some of the industries, but much of the economy is allowed to run as a ‘free market’ (prices, products and profits are not controlled). The UK is a mixed economy.
Fun facts about the economy
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The United Kingdom, which has a $2.83 trillion GDP, is the sixth-largest economy in the world.
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The word economy comes from the Greek word oikonomia meaning household management or thrift.
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Adam Smith is considered the father of modern economics. A Scottish philosopher he’s most famous for his book The Wealth of Nations, published in 1776. But economics can actually be traced as far back as the Bronze Age (4000-2500 BCE).
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The Nobel Prize in Economics is not a real Nobel Prize. Unlike Nobel Prizes for Science, Medicine and Literature which were created by Swedish industrialist Alfred Nobel in 1901, the Economics prize was created by Swedish bank, Sveriges Riksbank in 1968.
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Finland’s economy, which has one of the most equal societies in the world, has grown faster than the US.
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Most poor people don’t live in poor countries. Over 70% of people in absolute poverty actually live in middle-income countries.
Ways to teach kids about the economy
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Instead of giving your children an allowance, you could pay them for doing chores. It teaches them the relationship between work and money.
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Play games like Monopoly, Minecraft and The Game of Life with your kids. They’ll have fun while seeing how an economy works.
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Encourage your kids to use fun, financial education tools like GoHenry’s Money Missions. They’ll learn valuable money skills by watching videos, doing quizzes and playing interactive games.
Resources on economics and financial education for kids
Are your children and teens interested in economics? The Bank of England has some fantastic educational resources to explain how the economy works and what the Bank of England does.
You’ll find articles on explaining needs versus wants to children and how to teach kids about money as well as useful financial literacy resources on our blog.
There are also some great books for kids on economics. Here are a few:
For an introduction to economics for kids there’s Economics through Everyday Stories from Around the World. Cloud Tea Monkeys teaches kids about income inequality (among other things). For ages 12+ try Michael Goodwin’s graphic novel, Economix: How and Why our Economy Works (and doesn’t work).
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