How to explain money to your 10 years old kid
Let’s start from the beginning, what people did before money was invented?
Before money was invented, a person was producing a specific kind of product (clothing, gathering wood, hunting for meat, collecting berries, fishing for fish) and switching (trading) it for another product that some other person was producing.
For example, person A is a fisherman and person B is a shoemaker. Person A invests all his skills in fishing fish while person B invests all his skills in creating shoes. Since the fisherman can’t use his fish to create shoes, and neither the shoemaker can eat his shoes, the first market was invented. The fisherman traded his fish for the shoemaker’s shoes. In such a way both parties bettered their position. The fisherman now has both fish to eat and shoes to wear, and the same is true for the shoemaker. Both bettered their lives by participating in trade action.
Since the fisherman had only two feet, he did not require more than one pair of shoes. But the shoemaker needed fish to eat every day. So, he went to the lumberjack (person C) and traded his shoes for some wood. Then he went back to the fisherman and traded the wood for some fish. The shoemaker needed to drag the wood from the lumberjack to the fisherman, a very intense labor work for the shoemaker. Since the lumberjack had only two feet, the shoemaker needed to go to several lumberjacks to collect enough wood to trade for the fish, so he also needed to store and guard the wood while he was visiting different lumberjacks. This situation is far from ideal.
As societies got bigger and more complex, and people gathered into big groups (countries) a better system was needed. As a result, the concept of money was invented to make the trade of products easier.
Money is a number that is equivalent to the value of products that exist in a specific market. This definition's purpose is to give the reader a tangible understanding of what money (which is an abstract concept) means. You will get a full understanding of that definition by observing the following examples. By understanding what money is, you will know how to get more of it.
Example A: Imaginary country produces 100,000 apples and 100,000 tomatoes a year. In that country, one apple costs (value is) five coins of money, and one tomato costs (value is) five coins of money. In that case, the total of money in that market is 100,000x5+100,000x5 = 1,000,000 coins of money. But where does the money come from? The money is issued by the state as a form of coins (printing money) and it is injected into the market (given to people) by employing the country’s people to grow those apples and tomatoes (which makes the GDP – gross domestic product). Each worker gets 500 coins for a year of work.
Thus, the cycle of money is complete. The country pays in coins to the workers (country’s people) to grow the apples and tomatoes, and they use those coins to buy the apples and tomatoes to eat. By doing that, they return the coins to the state, and we can say that a cycle is complete and it will start all over again. That is why there is a saying “money makes the world go round”.
Now, bees entered the growing fields and as a result, the country produces twice as many apples and tomatoes a year. This is equivalent to positive growth in GDP (gross domestic product). If the country wants to keep the prices of apples and tomatoes the same, it has to issue more coins (print money) that are equivalent to the value that was added to the market. This is done by doubling the wage of the workers. Since the same number of workers has double the money, they can now buy double the products (apples and tomatoes) at the same price. Each worker gets 1000 coins for a year of work.
As time passes, and the population of the country doubles. The new workers which are currently unemployed are willing to work the fields for less than 1000 coins for a year of work since they need to eat and provide for themselves. As a result, the country lowers the wage back to 500 coins a year, so that every person will be employed, and by doing so, each person will get coins (money) to buy food.
Now, birds entered the growing fields and ate most of the bees. As a result, the country produces half of the apples and tomatoes that it used to (negative growth in GDP) and returned to the original amount of 100,000 apples and 100,000 tomatoes a year. But now, there are in the market twice as many coins as it should be. Before the birds, there were 200,000 apples and 200,000 tomatoes that were equivalent to 2,000,000 coins. Now, there are 100,000 apples and 100,000 tomatoes and there are 2,000,000 coins in the market that wants to buy them (instead of 1,000,000). Thus the price of apples and tomatoes will have to double. Why? If before the birds, an apple cost five coins, and a tomato cost five coins, and every person ate one apple and one tomato. Now, because of the shortage in supply, the people need to share/split every apple and tomato into two, so everyone could eat. The people will use the ten coins that yesterday bought them one apple and one tomato to buy just half an apple and half tomato. Thus, if half an apple and half a tomato cost ten coins, that means that a whole apple and a whole tomato now cost twenty coins (doubled in price).
There are more things the country can do to control its money representation (using the banking system, change employment rate, etc). This is just a basic understanding of what money represents.
In this example, we saw what money is and where it is coming from. We also saw the effects of positive growth and negative growth in GDP that can affect supply and demand and its effect on prices.
Example B: strong currency VS weak currency. Why some currencies worth more than others?
Since we know the definition of money, and that it represents the value of a specific market. If a currency is weak that means that the value (gross domestic products) that is being represented by that currency is less than the value that is being represented by a strong currency. For example, country A produces only clothing (low value) while country B produces only computers (high value). If a person from country A wants to buy a computer from country B he will have to “pay” with a lot of clothes (which is equivalent to many “coins” in his country A). Hence, if person A needs to pay a lot of currency A to buy a product from country B, that means that his currency is weak relative to the currency of country B.
Example C: Does money grow on trees? How do we get more of it?
Money does grow on trees! In less developed countries, there is a bank of rice. Now stop and ask yourself for a minute, how come there is a bank for rice?
Well, if you understand how rice works, you will understand how money works. Here is how rice works. The farmer goes to the rice bank and gets a loan of rice to plant his field. One variety of rice can produce a plant with 50 seeds from 1 seed. The farmer gets a loan of 1,000,000 rice seeds, plants them, and grows 50,000,000 rice seeds. He can return the loan 1,000,000 plus 200,000 interest to a total of 1,200,000 rice seeds. One kilogram of rice has on average 34,482 grains. The farmer is left with 1,415 kilograms of rice that can be sold in the US for $5,660. He now can use that money to pay for his expenses (labor and working tools) and make a profit. He can choose to pay his workers in rice and use the remaining rice to plant the field again (but now without a loan). He can choose to invest in his business and plant another rice field, and in doing so, to increase his next yield.
Pay attention that the workers, will take the rice as payment, and eat it or trade it for some other products. They will not plant it, and by doing so, they will not grow their rice (their money).
The investor is taking his money and just as the rice farmer invests (plants) in his business (field) to get some expected return (yield).
It is important to note there are no free meals in life. Every investment comes with a risk. A risk from not knowing the business (planting in the wrong area or time), risk from the economic environment (insects eating the crops, bad weather), and other risks.
Trading and investing in the stock market allows every person to become a rice farmer.