Every day when you go to work (or work from home), go to the store (or shop online), watch TV or use the Internet, you're not just living your own little life – you're participating in the global economy. And as the COVID-19 pandemic has shown us, the global economy is more interconnected than ever before.
What happens in China, Europe, South America or Africa can have an impact on people on the other side of the planet. Global supply chains help provide the food we eat, the cars we drive, and the laptop I use to write this article. Digital technologies have immediately opened up new possibilities for global collaboration and communication.
Every day people around the world wake up and get to work growing plants, building houses, building cars, making semiconductors, repairing ovens, flying planes, teaching classes, caring for patients, lighting fires delete and write code. We all contribute in our own small ways to this vast, complex web of transactions and relationships that we call “the global economy.”
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Let's look at some of the ways the global economy impacts your everyday life and your daily spending.
1. The price of oil affects the price of everything
The price of oil is an important economic indicator because it influences the price of so many other things people need. When oil prices rise, food prices tend to rise too – because the price of fuel for farm equipment and for the trucks that deliver food to grocery stores and restaurants rises. Due to the higher cost of food, restaurants may need to increase prices on their menus. Food delivery apps may charge an additional fee to compensate their drivers for the additional gas costs.
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The price of oil is often linked to the price of natural gas. Higher gas costs can lead to higher heating costs in the winter. This can increase the cost of doing business for anyone who has to pay utilities for a commercial office space or retail store.
Oil prices (and gasoline prices) fluctuate due to daily changes in the global economy. When many companies want to expand their operations, when many people want to drive more miles, when people are economically optimistic, that can drive up oil prices. When a crisis involving oil-producing countries occurs, such as a war in the Middle East or Russia's invasion of Ukraine, it triggers fear and panic in the global oil market – traders begin to worry that they are not will be able to get oil enough oil, so oil prices will rise.
In the 1970s, America suffered the so-called “oil shock” due to an oil embargo by the OPEC countries in the Middle East – there was a gasoline shortage and long queues of cars stood in front of gas stations. But in recent decades, America has begun producing much more oil and other energy sources than before. As of 2019, America is a net total energy exporter – meaning we sell more energy to other countries than we buy.
Hopefully, this high level of energy independence will keep America from going back to the bad old days of the oil shock. Higher gas prices are no fun, but ideally they won't become a national economic crisis like in the 1970s.
2. Exchange rates affect your purchasing power
Money changes hands around the world every day. Banks borrow and lend to each other, people make payments with their credit cards, companies place orders, and many of these transactions take place in multiple currencies. Exchange rates – how much money it takes to buy a certain amount of another country's currency – are an important part of the global economy.
When the U.S. dollar is “strong,” it means that the U.S. dollar can be used to purchase a greater amount of foreign currency than usual. During a recent trip to Montreal, Canada, the US dollar was equivalent to about $1.30 Canadian – making my Canada vacation feel really affordable. A $20 (Canadian) restaurant bill only cost me $15.38 in US dollars.
But when the U.S. dollar is “weak,” that means it is more expensive for Americans to buy foreign goods. So if the US dollar weakens, your imported African coffee, French cheese or Mexican tequila could become more expensive in US dollars. Exchange rates change constantly based on complex factors such as monetary policy, whether the Fed raises interest rates, and the overall demand for dollars in the global economy.
3. Problems far away can drive up your costs at home
Recently, a group of rebels in Middle Eastern Yemen (called the Houthis) began firing rockets at cargo ships in the Red Sea. This has led to a global shipping crisis as cargo ships have to take slower and more expensive routes. Disruptions in global shipping are increasing prices around the world, as 80% of global trade travels by sea.
Another shipping crisis is occurring at the Panama Canal, where a prolonged drought has reduced the canal's water levels. This made it more difficult for large ships to get through, causing long delays. If the Red Sea and the Panama Canal cannot be used by cargo shipping companies, there will be higher costs for everyone.
Conclusion: The global economy impacts your personal finances in many ways. You can see the impact of the global economy in the price of the food you buy, the purchasing power of your U.S. dollars on vacation, and the options available to you to invest your money.
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