Factors Affecting U.S. Producers & Consumers in International Markets

Instructor: LeRon Haire
The lesson will list and define several factors that affect U.S. producers and consumers in international markets including exchange rates, trade pacts, and trade barriers.

photo of a globe

The Factors Influencing International Markets

In today's business markets, competitors exist everywhere. In the past, these competitors were usually located domestically here in the U.S. Over time, companies expanded across the globe, which has led to the establishment of international markets. In any market, there are two primary players and they are called producers and consumers.

Producers are entities that make a good or product, such as a farmer or furniture manufacturer. A consumer purchases a product or good, such as a shopper in a grocery store. With this in mind, it's important that producers and consumers in the U.S. understand the factors that will have an effect on them in the international markets. Let's take a look at some of these factors including exchange rates, trade pacts, and trade barriers.

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International Markets and Exchange Rates

When U.S. companies want to establish internationally, one of the most important factors that will affect them is the exchange rate between the U.S. dollar and the currency in the country where they want an international presence. The exchange rate is defined as a price that compares the currency in one country to the currency in another country. It's what tells you how much of one currency you can buy with another currency.

For example, we know that the U.S. currency is the dollar and the European Union currency is the euro. If the exchange rate is U.S.$1.25 =EUR€1.00 that means that it would take $1.25 in American dollars to purchase 1 euro. This means that the euro currency is stronger than the dollar. Likewise, the Europeans only need to spend one euro and they will get in exchange, $1.25. The U.S. dollar is a weaker currency in this example. Exchange rates can fluctuate, so the exchange rate between two currencies today can be different from day to day.

Exchange rates are important factors affecting U.S. producers and consumers in international markets because they influence behavior. For example, let's assume that a U.S. producer of furniture wants to sell his furniture in France. France is a country in the European Union that uses the euro. The furniture manufacturer needs to be aware of the exchange rate between the dollar and the euro, because his sales in France may be directly affected by it. If the euro is strong and the dollar is weak, his furniture will be less expensive to European consumers, and they very well may buy more furniture. If the opposite situation occurs, and the euro becomes weak, then his furniture will be more expensive to European consumer. Again sales and profit could be affected, but this time negatively for the manufacturer.

photo of people shaking hands

International Markets and Trade Pacts

A trade pact, also called a trade agreement, is an agreement between two or more countries that is designed to increase the level of trade between the countries. Producers and consumers are often directly affected by these trade pacts.

For example, let's assume that the U.S. and Japan have a trade pact in place that allows the U.S. to receive automotive parts from Japan at a fraction of the normal cost. The U.S. is now more prone to purchase additional parts due to their low cost. As producers of the automotive parts, Japan is affected because they are able to make more money from the additional sales to the U.S.

Conversely, the trade pact will also impact consumers of the U.S. automotive market. By purchasing automotive parts at a discount from Japan, the U.S. is able to pass those savings on to consumers by lowering costs for automotive parts to wholesalers as well as people looking to purchase parts themselves directly.

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