Economy is such an all-inclusive, all-encompassing subject, that it can mean many things to many people.

You might think that economy is the state of living frugally and saving money. Or, the type of reliable “economical” car we seek when shopping for an auto loan. An economy may also represent the wealth and resources of a local region, or a country, too, like the production and consumption of goods and services.

If you agree with any of these examples, you’re correct. An economy is all of them and more. More than we may consider about our local and national economic systems is that they play a great role in how our personal finances work — to how products are priced, how much we pay for them, even how interest rates at banks and credit unions are determined.

Interested in learning how the economy can help your bank account? Read on.

The U.S. Economy

We live in a free market economy. The U.S. economy functions on capitalism, which allows vendors to set their own prices on products on a supply-and-demand basis. This can have a big effect on the economy. If demand for a certain product goes up, its price may increase to support its supply — this is called inflation. And when prices rise, it can affect how much you can or can’t afford to spend.

The general economic health of a country, the U.S. included, is measured in terms of its Gross Domestic Product. Also abbreviated GDP, it’s a nation’s market value based on the output of goods production.

How does GDP affect the economy? According to Kiplinger, citing The Economist, a depression happens when GDP declines by at least 10%. A GDP decrease for two consecutive quarters is a recession.

How Political Economy Works

Government policies plays a big role in how a country’s economy plays out, too. According to Kiplinger, it’s the Federal Reserve – the central bank authority known as “The Fed” — that regulates the total amount of the U.S. money supply, the buying/selling of bonds and the amount of physical cash banks keep in their vaults. The Fed also controls the value of the U.S. dollar.

Some other ways our economy is influenced by government include:

• The unemployment rate. Unemployment can affect the economy because it prompts people to curb their spending — which lowers demand for goods. This, in turn, can affect how the global economy affects the U.S. economy, as fewer goods are imported to the U.S. from other nations. Unemployment has also been known to be linked to home foreclosures, and was a catalyst in the 2008 housing market crash.
• Taxes. Government officials, from the state to national level, also dictate how many taxes we pay. Though it varies from state to state, it can affect or sway how we manage our money.

Your “Personal Economy”

The U.S. economy is still recovering. And we only have so much influence on how the federal government repairs it. Until then, you can still take hold of your personal finances. Here are a few tips for building your own “personal economy”:

• Build a savings fund. If unemployment is a problem or just a strong concern, having enough emergency/fallback money on hand is a wise investment to start making.
• Limit spending and debt. Avoid big-ticket purchases when possible, and use your debt limit wisely.
• Make investments. There are plenty of ways to build a solid financial portfolio, from simple savings accounts, to CDs, to investing in stocks.

Also, stay up-to-date with current economic news. When keeping track with market conditions, interest rates and other money trends, you can make better, wiser financial decisions, staying economical when it matters most.