Understanding economics is essential for knowing how the world works, and to understand economics, one must understand transactions.
A transaction is basically an agreement between person A and person B, to exchange a certain amount of money for goods and services. But the economy includes more steps along the way, which we can explain with 3 foundations:
- Tax – When a transaction occurs, the government gets tax out of it. The government then invest the tax money in building infrastructures, which help in the distribution of goods all over the world.
- Loans – The bank loans money to businesses to get the money back with interest, businesses use loans for funding research and development of goods and services.
- Investments – Investors take risks by giving money for businesses to use for research and development, in return for making a potential profit out of the goods and services they invested in.
Why your child must understand how economics work
Teaching children about economics is no easy task, but it is crucial for them to know these things to understand how the world works and how to face the financial challenges it will throw at them in the (very near) future.
There are many ways to teach your children about economics (except for the boring way of just explaining it to them). The most practical way is by paying them to do chores around the house and teach them how to make a budget and save up for big purchases.
Another highly effective and fun way for children to learn about economics is by playing transaction-related games, whether it’s by playing SimCity, Stardew Valley or some good old-school monopoly.
Either one of those ways, or best of all – a combination of both, will help your children grasp the meaning of economics and learn economic decision making well before they face the challenges of the real world.
Here is a great video from Ray Dalio about how the economic machine works.