World Economic Factors and Personal Finances

Economic factors across the country and around the world can affect personal finances. They play a role in day-to-day financial planning and decision making for most people. Economics is the study of the decisions that go into making, distributing, and using goods and services. The economy consists of the ways in which people make, distribute, and use their goods and services. To understand economics and the economy, you need to be aware of the market forces, financial institutions, global influences, and economic conditions that affect global as well as personal decisions.

Market Forces

The forces of supply and demand determine the prices of products, or goods and services, you purchase. Supply is the amount of goods and services available for sale. Demand is the amount of goods and services people are willing to buy. When there is a high demand for an item, such as a popular toy, or when a company cannot manufacture enough of a certain product to keep up with the demand, the price of the product rises. When there is little demand for a product, or when a company produces more than it can sell, the price of the product drops.

Financial Institutions

Most people do business with financial institutions, which include banks, credit unions, savings and loan associations, insurance companies, and investment companies. Financial institutions provide services that increase financial activity in the economy. For example, they handle savings and checking accounts, provide loans, sell insurance, and make investments for their clients.

Among the various government agencies that regulate the financial activities of financial institutions, the Federal Reserve System has a significant responsibility in the U.S. economy. The Federal Reserve System, or the Fed, is the central banking organization of the United States. Its primary role in the U.S. economy is the regulation of the money supply. The Fed controls the money supply by determining interest rates and by buying or selling government securities. Its decisions affect the interest rate you earn on your savings, the interest rate you pay when you borrow money, and to some extent the prices of the products you buy.

Global Influences

You and the money you spend are part of the global marketplace, which is another economic factor that can affect financial planning. Look at the items in your home or classroom and you will discover that many of the products were made in other countries. The economy of every nation is affected by competition with other nations. Each country wants consumers in other countries to buy their products. When other countries sell more goods to the United States than U.S. companies can sell in those markets, more money leaves the United States than enters it. Then less money is available for spending and investing, and interest rates may rise. These global economic financial crisis influences also affect financial decisions.