Usually it's said to try and get somebody to put things in perspective. Like the earth is large but relative to the universe it is small .

Spilling something on your favourite dress and having a fight with a friend might feel like the worse day ever -but everything is relative ...somebody else out there is having a much worse time. At least you have a dress to ruin and friends to upset , ya know ? 

It means that everything depends on the individual's perception and opinions.

- It's very cold today !

- Seriously ? I think it's the warmest day of the week !

- Well .. Everything is relative :)

-Oh my God, I got stuck in traffic coming out of Kiev on Friday evening. There's nothing worse.

-I don't know. You should try getting stuck in traffic on Friday afternoon in Shanghai. Everything is relative, Ms. Baiul. ;)

Dave 

It's good to think of the words "relative" and "absolute" as a pair. "Relative" means "a value compared to another value"; and "absolute" means "a value". Saying "it's two degrees warmer today than it was yesterday" is a relative statement. Saying "it's 20 degrees today" is an absolute statement.

Yes, people do say "everything is relative", but that's a clumsy and vague and unclear concept (IMO). I prefer to think "you can look at every absolute value as a relative value, instead, if you like. And either feel better about it that way, or gain a different insight into it". That concept seems clearer and more actionable, to me.

What @Salma is referring to in her answer is not "relative" but "subjective" (the opposite of which is "objective"). Subjective/objective are not *the same as* relative/absolute, but I can see why people conflate them. :D