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 are not just living your own little life — you are 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 or Europe or South America or Africa can affect people on the other side of the planet. Global supply chains help provide the food we eat and the cars we drive and the laptop computer that I’m using to type this article. Digital technologies have opened up new ways of collaborating and communicating worldwide, instantly.
Every day, people all over the world wake up and go to work growing crops, building houses, making cars, fabricating semiconductors, fixing furnaces, flying planes, teaching classes, caring for patients, putting out fires, and writing code. All of us are contributing in our own small way to this massive, complex web of transactions and relationships that we call “the global economy.”
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Let’s look at a few ways that the global economy affects your everyday life and daily spending.
1. The price of oil affects the price of everything
The price of oil is a major economic indicator, because it affects the price of so many other things that people need. If the price of oil goes up, the cost of food tends to go up — because the price of fuel goes up for farm equipment, and for the trucks that ship food to grocery stores and restaurants. Restaurants might need to raise prices on their menus because of their higher food costs. Food delivery apps might start charging an extra fee to compensate their drivers for the added costs of gasoline.
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The price of oil is also often linked with the price of natural gas; higher costs of gas can cause higher heating bills in the winter. This can make the cost of doing business more expensive for anyone who has to pay utilities for a commercial office space or a retail store.
Oil prices (and the price of gasoline) fluctuate based on day-to-day changes in the global economy. When lots of companies want to expand their operations, when lots of people want to drive more miles, when people are feeling economically optimistic, this can drive up oil prices. When there is a crisis involving oil-producing countries, such as war in the Middle East or Russia’s invasion of Ukraine, this causes fear and panic in the global market for oil — traders start to worry that they won’t be able to get enough oil, so oil prices go up.
Back in the 1970s, America suffered what was called the “oil shock” due to an oil embargo by the OPEC nations of the Middle East — there were shortages of gasoline, and long lines of cars lined up outside of gas stations. But in recent decades, America has started to produce much more oil and other energy than it used to. Since 2019, America has been a net total exporter of energy — meaning we sell more energy to other countries than we buy.
Hopefully, because of this high level of energy independence, America will not go back to the bad old days of the oil shock. Higher gas prices are no fun, but they ideally will not become a national economic crisis like they were in the 1970s.
2. Currency exchange rates affect your buying power
Every day, money is changing hands all over the world. Banks are borrowing from each other and lending to each other, people are making payments with their credit cards, companies are placing orders, and many of these transactions are happening in multiple currencies. Currency exchange rates — how much money it takes to buy a certain amount of another country’s currency — are a major part of the global economy.
When the U.S. dollar is “strong,” that means the U.S. dollar can buy a larger-than-usual amount of foreign currency. During a recent trip that I took to Montréal, Canada, the U.S. dollar was equal to about $1.30 in Canadian dollars — this made my Canada vacation feel really affordable. A $20 (Canadian) restaurant bill only cost me $15.38 in U.S. money.
But when the U.S. dollar is “weak,” that means it’s more expensive for Americans to buy foreign goods. So if the U.S. dollar becomes weaker, your imported African coffee, French cheese, or Mexican tequila might get more expensive in U.S. dollars. Currency exchange rates are constantly changing based on complex factors like monetary policy, whether the Fed raises interest rates, and overall demand for dollars in the global economy.
3. Faraway problems can raise your costs at home
Recently, a group of rebels in the Middle Eastern country of Yemen (called the Houthis) have started shooting missiles at cargo ships in the Red Sea. This has caused a global shipping crisis, as cargo ships have to take slower, more expensive routes. Disruptions to global shipping raise prices all over the world, because 80% of the world’s trade travels by sea.
Another shipping crisis is happening at the Panama Canal, where a prolonged drought has reduced the canal’s water levels. This has made it harder for big 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.
Bottom line: The global economy affects your personal finances in a multitude of ways. You can see the global economy at work in the price of the food you buy, the spending power of your U.S. dollars on vacation, and in the opportunities available for you to invest your cash.
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