Sunday, October 05, 2008

Economics For Children

Say I give you a dollar a week as your allowance. You are free to spend this right away on something you like. But say you want something that costs $2. Now you must save your dollar from this week and wait until you get another dollar next week. Then you will have $2 and can buy the more expensive item. If you want something that costs $50 you'll have to carefully save for most of a year.

This is how it works for children, but for adults things can be different. Because adults do not want to wait. They want to buy things before they have the money.

Some things adults need cost an awful lot, and no matter how much they work and how long they save it is difficult to get these things. A good example is a house. Some people might work for many years before having enough money to buy a house.

There are other reasons to have a house besides to provide a roof over your head. For instance, it saves spending hard-earned money on rent. Let's simply say that for various reasons adults do not want to wait to own a house. So what do they do?

Let's say you want a house that costs $100,000 and have managed to save $10,000. To get the difference you'd go to a Bank or a Mortgage Company or a Savings & Loans or a Credit Union. For this purpose they are all the same. The bank manager looks at your ability to earn and investigates your past record with them and other lenders. They perform what is called a "credit check" and if they find you are a "good risk" they will lend you enough to get the house. This special type of loan is called a mortgage.

So now you can live in a house that the bank has funded in the amount of $90,000. Every month you must pay them a fraction of what you borrowed. They also charge extra for this service, an amount called interest. That's how the bank makes money from you. They do not lend you the money out of goodwill; they wish to make a profit. Banks and other lenders generally make an awful lot of profit.

Eventually if you keep repaying the loan each month you will have repaid the entire $90,000, plus a large amount of interest. This might take twenty or thirty years or even more. You will then completely own the house. But until then, although you might live in the house and it looks like it is yours, the bank owns the house. If you fail to pay the monthly amount, the bank can take the house away from you. This is called foreclosing on a loan.

When the bank repossess the property you not only lose the house, you lose all the money you've so far paid to the bank, plus the amount you started off with. This is a horrible thing.

And this applies not only for houses. People take out loans for cars, for furniture, appliances, entertainment systems, vacations and more. In some countries it is common for people to owe a great deal of money they do not have. We call that "debt".

In the USA the average person has personal debt of over $46,000. Think about how much that is for a moment: forty-six thousand dollars per person. It is no wonder then that more and more people are unable to pay their bills. Family after family are ending up on the streets.

And now this loan crisis is even causing businesses to collapse. When family after family goes broke no-one seems to notice, but as soon as big business is affected government stops to take note. I will explain this in the next article.


1 comment:

onno david said...

This blog is so helpful. I have been reading this blog for long time. Your explanation was very easy to read and understand! affected and technically perfect. I think Economics very impotent for children.Economics is such a basic part of everyday life that it can be found everywhere. When we use stories, movies or poems to teach it, then students begin to realize why learnding decision making (i.e., economics) is so important. thank you for shearing your post.

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