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In school, children may learn that the United States has a capitalist economy. They also may learn about historic events such as the Great Depression, but until they take a course in economics in college or their senior year in high school, they don't usually learn a lot about how the economy operates.
You might be asking yourself why kids need to know this. Good question. Economics sounds like a dreary academic activity, but it's not just for textbooks. Knowing about economics helps children to understand how things work. Kids are dealing with economic factors every day, even if they don't know it. When you start filling them in on some important financial issues, you might be surprised at the outcomes:
Inflation is an economic condition that results from an increase in the money supply. It causes the value of things to fall and the price of things to rise. At its most basic level, inflation boosts the cost of goods and services.
- Things that may make no sense to kids begin to come into focus, such as why a toy with a sale tag of $10 costs $10.80 when sales tax is applied at the checkout line.
- News reports they read about or hear on such topics as inflation and the price of crude oil start to make sense. A teenager will be able to understand why filling up the gas tank in the family car can vary from week to week.
- Taxes, a subject children may hear about in the news or when you're at the dinner table, are confusing to everyone. But children may already be paying taxes—on things they buy or on wages they earn. You don't have to be a tax expert to share what the different taxes are all about and how they can impact your child.
Grandparents can remember that a nickel used to buy a subway ride, a movie ticket, a pay telephone call, or a hot dog. Tell this to your child today, and he'd probably laugh. So what makes the same nickel subway ride of yesterday cost $1.50 today? A part of the explanation is inflation.
Financial Building Blocks
Historically, inflation has averaged about 3 percent a year. In the past several years, we have been in a low inflation environment (less than 3 percent). This low inflation is expected to continue in the foreseeable future, but many still remember double-digit inflation in the 1970s and early 1980s.
Why should kids be concerned with inflation? It can directly affect their buying power. Let's say your child receives a $10 allowance. If inflation is just 3 percent, then after one year your child would need $10.30 to buy the same things that her $10 allowance had in the previous year. It's not that she'd have to present $10.30 for an item marked $10; rather, the price of that $10 item may be increased for inflation, showing a price tag of $10.30. Kids have seen the price of a movie ticket jump from $6 to $7.50, and this increase can be explained in part by inflation.
If your child is a teenager and has a job, understanding inflation will put any salary increases in perspective. He'll want his wages to increase more than the rate of inflation so that the increase isn't just keeping pace with inflation; he'll want to make sure he's getting a real raise.