The Importance of the Economy

Each and every day, we're subjected to tons of economic information from numerous sources, including television, newspapers and magazines, radio, and the Internet. And even with such an overload of data as this, it represents only a minuscule fraction of the monumentally large and complicated puzzle that makes up the economy. To make matters worse, this disseminated fraction is usually expressed in such technical jargon that it's difficult for anyone without an advanced degree in Economics to understand it. Economic information often appears convoluted and ambiguous, and it's easy to see why Mr. and Mrs. John T. Average question whether or not it's even worth trying to understand how the economy works.

But, it is important, very important. Understanding at least the basic mechanisms of a nation's economy is essential if one is to be a better-informed citizen and voter. Economic fluctuations can affect all or specific industries and, as such, the stability of your job. Further, knowledge of the economy may influence your choice of careers or encourage a decision to change occupations. Additionally, having an understanding of how the economy works can help in making sound investment choices.

The word "investing" is generally used to refer only to the buying and selling of stocks or other securities, which most individuals actually do not participate in. (Even so, the surge in mutual fund sales over the last ten years has significantly increased the number of people who own stocks indirectly, and that has intensified their interest in the economy, financial markets, and corporate profits.) However, investment decisions span a much broader range than just securities, and they're made by virtually every person every day. We constantly make decisions about what to consume and how to invest. For example, investment decisions are made when buying or refinancing a home and deciding whether to use a fixed or adjustable-rate mortgage. Paying with cash or credit for a big-ticket item is also an investment decision. So are taking out a personal loan and deciding whether to put money aside in a savings account, money-market fund, or certificate of deposit. All of these decisions are influenced by movements in interest rates, which themselves are affected by movements in the economy.

Future income can also be affected by economic changes. For instance, the value of a company pension plan can change due to fluctuations in interest rates and stock prices. And while this may not be of much importance if pension benefits are determined by an employee's salary levels and years of service, it could be critical if benefits are indexed to the market value of the plan. Some employee benefit plans offer a selection, allowing the choice of a combination of investments that can be changed from time to time.

Two things, therefore, are clear: first, that economics and all investments are fundamentally intertwined; and second, that we all continually make decisions that affect our present and future economic well-being. The quality of these decisions can improve with a better understanding of how and where the economy is, where it's going, and how to track its changes. Knowing how to interpret fluctuations in the economy is important. All investment decisions are impacted by economic changes – whether or not those decisions have anything to do with buying and selling stocks.

 

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