How Does Economics Affect Your Life?

Economics began affecting your life before you were born, playing a role in what kind of health care your mother received during pregnancy and where your parents lived. Few aspects of life are not affected by the allocation of resources. The flow of money and goods from person to person has an effect, for example, on what you eat and wear, and how much education you get. Whether you're surviving on bread and water or sipping vintage champagne, your fortunes are affected by what happens in the greater economy.

Trade agreements that allow goods manufactured overseas to be imported to the United States result in companies locating factories in countries where labor is cheaper. As a result, fewer manufacturing jobs are available to U.S. citizens; another result is an abundance of relatively inexpensive clothing, electronics and plastics. The global economy also affects the cost of foreign travel, as currency exchange rates rise and fall. Your dollar might be worth 15 Mexican pesos when you arrive in Cancun and 13 by the time you leave.

Any time you save or borrow money, your experience will be affected by interest rates set by the Federal Open Markets Committee of the Federal Reserve. This committee has the power to change the federal funds rate -- the interest banks pay in dealing with each other -- in an attempt to keep the economy running smoothly and avoid inflation. Changes in the "prime rate" affect the interest rates you will be charged on a mortgage, car loan or credit card and the interest rates you will receive on savings.

State, federal and local taxes all affect your personal finances. Income taxes dictate how much money will be taken out of your paycheck before you receive it or how much you will have to pay if you're self-employed. Sales taxes affect the cost of the goods and services you purchase. School taxes affect the cost of home ownership. What the government does with the tax monies it collects also affects your life. Tax dollars fix potholes, pay police officers and provide amenities such as national parks and community colleges.

Once, a $20 bill covered dinner and a movie. No longer. Inflation, the overall steady rise of prices for goods and services, is one of the economic factors that most directly affects your everyday life. Economists point to various causes for inflation, such as demand being greater than supply and the costs of labor and materials driving up prices. When paychecks and fixed incomes keep up with inflation, moderate inflation is seen as an indicator of economic growth. When they don't, the average person is in trouble. To measure the actual rate at which inflation takes place, economists gather price data on a wide range of items in different places to create the Consumer Price Index, or CPI.