A Kid's-Eye View of the Economy

Tuesday, March 10, 2009

T he economy is not something kids ordinarily think much about, and many adults don't think about it, either.

But these aren't ordinary times. The U.S. economy and others around the world have run into serious trouble, so the economy is the biggest news of the year.

You might know firsthand about the economy's troubles because one of your parents lost a job. Or maybe you won't take a trip for spring break because your parents want to save money. Or you might have heard adults tossing around words such as "bailout" and "stimulus."

This may help you understand what is happening:

What Is an Economy?

It is a system in which people buy and sell goods (such as televisions) and services (such as haircuts). When your parents pay for a haircut, that means the barber has money to, for example, buy a TV. Money is the gas in an economy's engine.

When our economy works well, banks lend money to companies so those companies can operate and grow. Individuals go to banks to borrow money to buy houses, cars and other things.

What Went Wrong?

A lot of people made a lot of bad decisions. Banks loaned money to people who couldn't afford to pay it back. Government officials didn't watch the banks closely enough to make sure they were making good loans.

So suddenly, banks had loaned out a lot of money and weren't getting much of it back. And people who couldn't afford to pay back the money started losing their homes. (If you can't make the monthly payments, called a mortgage, the bank has the right to take the house back and not let you live there anymore).

If banks don't have money, they can't make new loans: to your family to buy a new car or to the car company to build a new plant. So businesses started to fail. People lost their jobs, and without the money from a job, they couldn't pay their bills.

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