3.

ECONOMY AND DEVELOPMENT

a. Economy

What is the ‘invisible hand’?

The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'. He assumed
that an economy can work well in a free market scenario where everyone will work for his/her own interest.
The unobservable market force that helps the demand and supply of goods in a free market to reach
equilibrium automatically is the invisible hand.
The Invisible Hand. The premise of Adam Smith’s invisible hand is that buyers and sellers, free of any
government interference and merely following their self-interest, wFrom which we can gather two things.
The first being that Smith's vision of homo oeconomicus was a long way from the monstrous caricature of it
laid out by critics of the more modern homo economicus. Smith is quite baldly stating there that people do
not act purely for monetary considerations. There's much more to be taken into account: people will give up
extra profits for the sake of being able to sleep easily at night for example, not worrying about what Johnny
Foreigner has been doing with their stuff.
And secondly and in more detail, it informs us about who really bears the burden of corporate and
capital taxation. The standard analysis is that it's some mixture of shareholders/capitalists and all the
workers in the taxing jurisdiction. Average wages are determined by average labor productivity. Labor
productivity is raised by capital being added to labor. So, if we tax capital in one jurisdiction then some
foreign capital that would have been invested there will not be: it'll go somewhere else where it is not taxed.
Similarly, some domestic capital will leave to be invested elsewhere where it is not taxed. There's thus less
capital in that taxing jurisdiction, lower labor productivity on average and thus all wages are lower. This is
still at the heart of modern optimal taxation theory.
Quite how much this burden gets split depends upon the mobility of capital. The more mobile the
more it is labor and the less the shareholders. In an entirely autarkic economy 100% on the shareholders.
And, in theory, with perfectly mobile capital, 0% on shareholders. But Smith here is telling us that is wrong.
For while the tendency will be that way there's always going to be either some portion of capital, or some
portion of capitalists, who prefer to invest at home. Just because. And thus even if capital is theoretically
perfectly mobile it just doesn't pan out that way.
OK, that domestic capital carries some of the burden of capital taxation is interesting but it's hardly a
stunning public policy point.
However, there is a serious public policy point here. If people who, as American Prospect is trying to do,
decide to run a large series on why the free market doesn't work then we've an absolute right to check what
they know about said free market. If they're critiquing something that exists only in their own imaginations
then we can perhaps dismiss them as fantasists. If they've got some accurate and interesting criticisms
(and Lord Knows there's enough of those to be going around) then perhaps we might pay attention.
This particular writer on this particular subject is paying attention to some phantasm of his own devising.
This isn't what Smith meant by "invisible hand" and isn't what he said about it. It's absolutely nothing at all
to do with the free market, pure and unadorned, being the right way to organize things nor does it bring
about a perfect world.

What is ‘economic interventionism’?

Economic interventionism (sometimes state interventionism) is an economic policy perspective favoring
government intervention in the market process to correct the market failures and promote the general
welfare of the people.Economic intervention can be aimed at a variety of political or economic objectives,
such as promoting economic growth, increasing employment, raising wages, raising or reducing prices,
promoting income equality, managing the money supply and interest rates, increasing profits, or addressing
market failures.

Arguments for government intervention

Greater equality – redistribute income and wealth to improve equality of opportunity and equality of
outcome.
Market failure – Markets fail to take into account externalities and are likely to under-produce public/merit
goods. For example, governments can subsidise or provide goods with positive externalities.
Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.
Arguments against government intervention
Governments liable to make the wrong decisions – influenced by political pressure groups, they spend on
inefficient projects which lead to an inefficient outcome.
Personal freedom. Government intervention is taking away individuals decision on how to spend and act.
Economic intervention takes some personal freedom away.
The market is best at deciding how and when to produce.

Facts:
-The new administration coming in on May 29th, 2015 must come forward sooner rather than later to share
with Nigerians who have lost faith in the Naira and unless some drastic measures are taken, inflationary
pressures would result in severe economic dislocation
It is common knowledge that we need power and infrastructural development, but a more productive
debate is: What will the government do in the short-to-the-medium term? In the short term, it is my hope
that the emphasis would be on energy, security, law and order, social discipline, and social development. It
is difficult to disagree with other issues raised by President-elect Buhari, but my concern is not about the
“what-to do’’ as we say in strategy, but more about the “how to do”, which means execution.

b. Development Theory

What is ‘modernization’ theory?

The classic economic modernization refers to the revolutionary changes that have been going on in the
economic field since the 18th century, including the all-round industrialization of national economy,
continuous increase of labor productivity, and constant growing of the international economic competition.
The general economic modernization theory is a theoretical interpretation of the economic modernization
phenomena from the 18th to the 21st century. It is the application of the second modernization theory in the
economic field and was first put forward by Chinese scholar He Chuanqi. The general economic
modernization theory includes the general theory, branch theories, and related theories. Our current
knowledge of the second economic modernization and integrated economic modernization is limited. The
general economic modernization theory awaits much more studies and further development.

What is the ‘dependency’ theory?

Dependency theory became popular in the 1960’s as a response to research by Raul Prebisch. Prebisch
found that increases in the wealth of the richer nations appeared to be at the expense of the poorer ones.
In its extreme form, dependency theory is based on a Marxist view of the world, which sees globalisation in
terms of the spread of market capitalism, and the exploitation of cheap labour and resources in return for
the obsolete technologies of the West. The dominant view of dependency theorists is that there is a
dominant world capitalist system that relies on a division of labour between the rich 'core' countries and
poor 'peripheral' countries. Over time, the core countries will exploit their dominance over an increasingly
marginalised periphery.
Dependency theory advocated an inward looking approach to development and an increased role for the
state in terms of imposing barriers to trade, making inward investment difficult and promoting
nationalisation of key industries.

What is ‘post-development’ theory?

Postdevelopment theory (also post-development or anti-development or development criticism) holds that
the whole concept and practice of development is a reflection of Western-Northern hegemony over the rest
of the world. Postdevelopment thought arose in the 1980s out of criticisms voiced against development
projects and development theory, which justified them.
To cite an example of this "mental structure", development theorists point out how the concept of
development has resulted in the hierarchy of developed and underdeveloped nations, where the developed
nations are seen as more advanced and superior to the underdeveloped nations that are conceived as
inferior, in need of help from the developed nations, and desiring to be like the developed nations. The
post-development school of thought points out that the models of development are often ethnocentric (in
this case Eurocentric), universalist, and based on western models of industrialization that are unsustainable
in this world of limited resources and ineffective for their ignorance of the local, cultural and historical
contexts of the peoples to which they are applied. In essence, the problem post-development theorists see
in development and its practice is an imbalance of influence or domination by the west. Post development
theorists promote more pluralism in ideas about development.

c. International Economy

What are the principles of WTO?

Trade without discrimination

1. Most-favoured-nation (MFN): treating other people equally

Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant
someone a special favour (such as a lower customs duty rate for one of their products) and you have to do
the same for all other WTO members.

This principle is known as most-favoured-nation (MFN) treatment . It is so important that it is the first article
of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a
priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the
principle is handled slightly differently. Together, those three agreements cover all three main areas of
trade handled by the WTO.

Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only
to goods traded within the group — discriminating against goods from outside. Or they can give
developing countries special access to their markets. Or a country can raise barriers against products that
are considered to be traded unfairly from specific countries. And in services, countries are allowed, in
limited circumstances, to discriminate. But the agreements only permit these exceptions under strict
conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it
has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or
strong.

2. National treatment: Treating foreigners and locals equally

Imported and locally-produced goods should be treated equally — at least after the foreign goods have
entered the market. The same should apply to foreign and domestic services, and to foreign and local
trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment
as one’s own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17
of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of
these.

National treatment only applies once a product, service or item of intellectual property has entered the
market. Therefore, charging customs duty on an import is not a violation of national treatment even if
locally-produced products are not charged an equivalent tax.

Freer trade: gradually, through negotiation

Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned
include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities
selectively. From time to time other issues such as red tape and exchange rate policies have also been
discussed.

Since GATT’s creation in 1947-48 there have been eight rounds of trade negotiations. A ninth round, under
the Doha Development Agenda, is now underway. At first these focused on lowering tariffs (customs
duties) on imported goods. As a result of the negotiations, by the mid-1990s industrial countries’ tariff rates
on industrial goods had fallen steadily to less than 4%.

But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to the new
areas such as services and intellectual property.

Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries
to introduce changes gradually, through “progressive liberalization”. Developing countries are usually given
longer to fulfil their obligations.

Predictability: through binding and transparency

The multilateral trading system is an attempt by governments to make the business environment stable and
predictable. In the WTO, when countries agree to open their markets for goods or services, they “bind” their
commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries
tax imports at rates that are lower than the bound rates. Frequently this is the case in developing countries.
In developed countries the rates actually charged and the bound rates tend to be the same.
The result of all this: a substantially higher degree of market security for traders and investors.
The system tries to improve predictability and stability in other ways as well. One way is to discourage the
use of quotas and other measures used to set limits on quantities of imports — administering quotas can
lead to more red-tape and accusations of unfair play. Another is to make countries’ trade rules as clear and
public (“transparent”) as possible. Many WTO agreements require governments to disclose their policies
and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade
policies through the Trade Policy Review Mechanism provides a further means of encouraging
transparency both domestically and at the multilateral level.

Promoting fair competition

The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate. The system
does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of
rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of
trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The
issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond,
in particular by charging additional import duties calculated to compensate for damage caused by unfair
trade.
Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property,
services, for example. The agreement on government procurement (a “plurilateral” agreement because it is
signed by only a few WTO members) extends competition rules to purchases by thousands of government
entities in many countries. And so on.

Encouraging development and economic reform

The WTO system contributes to development. On the other hand, developing countries need flexibility in
the time they take to implement the system’s agreements. And the agreements themselves inherit the
earlier provisions of GATT that allow for special assistance and trade concessions for developing countries.
Over three quarters of WTO members are developing countries and countries in transition to market
economies. During the seven and a half years of the Uruguay Round, over 60 of these countries
implemented trade liberalization programmes autonomously. At the same time, developing countries and
transition economies were much more active and influential in the Uruguay Round negotiations than in any
previous round, and they are even more so in the current Doha Development Agenda.
At the end of the Uruguay Round, developing countries were prepared to take on most of the obligations
that are required of developed countries. But the agreements did give them transition periods to adjust to
the more unfamiliar and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-
developed” countries. A ministerial decision adopted at the end of the round says better-off countries
should accelerate implementing market access commitments on goods exported by the least-developed
countries, and it seeks increased technical assistance for them. More recently, developed countries have
started to allow duty-free and quota-free imports for almost all products from least-developed countries. On
all of this, the WTO and its members are still going through a learning process. The current Doha
Development Agenda includes developing countries’ concerns about the difficulties they face in
implementing the Uruguay Round agreements.

What is developmental aid? Why is it given?

Development aid or development cooperation (also development assistance, technical assistance,
international aid, overseas aid or foreign aid) is aid given by governmental and other agencies to
support the economic, social, and political development of developing countries. It may be given by
developed countries and/or developing countries. This form of aid is distinguished from humanitarian aid as
being aimed at alleviating poverty in the long term, rather than alleviating suffering in the short term.
Forms of development aid
Financial and technical assistance should be aimed exclusively at promoting the economic and social
progress of developing countries and should not in any way be used by the developed countries to the
detriment of the national sovereignty of recipient countries. (This, unfortunately, only holds in instances
where the governments of the given developing countries are not corrupt and are not using the aid to
improve their own well-being.)

 Aid may be bilateral, given from one country directly to another; or it may be multilateral,
given by the donor country to an international organization such as the World Bank or the
United Nations Agencies (UNDP, UNICEF, UNAIDS, and so forth) which then distributes it
among the developing countries.
 It is largely unimportant whether the “development aid” has any political implication (apart from
impeding the national sovereignty of recipients) attached to it. There are two reasons for this
statement:
1. Firstly, the non-governmental organizations (NGOs), such as the World Bank, European
Bank for Reconstruction and Development (EBRD), African Development Bank (ADB), Aga
Khan Foundation, Soros Foundation, and so forth, claim that they are (or theoretically should
be) above politics and their only reason is to increase the well-being of the people in the
world at large.
2. Secondly, every short or long-term “development aid” politicizes the recipient country society
anyway, simply because the distribution goes along (or it is directly controlled by) the
indigenous political channels, and so only deepens the original political and social disparities
there, directly fueling political uprisings. For example, a popular revolt sparked by allegations
of government interference in parliamentary elections and fueled by poverty and corruption
in Kyrgyzstan swept President Askar Akayev, who had led the country since independence
in 1991, from power in 2005 (BBC News, 2013). In the largest instance of development aid,
the Marshall Plan (1947 – 1950), the political dangers and clouds over the rest of Europe,
not already in the Soviet influence sphere, were already clear. Although originally offered to
all European countries devastated by World War II, inclusive of the USSR, Poland,
Czechoslovakia, and others, the Cold War politics of the USSR pulled those countries under
the Kremlin dictate out of the Plan (Davenport, 1967).
Important terms that should be recognized in any type of aid:
 Donors denote any developed or developing country that will provide, to the greatest extent
possible, an increased flow of, either, aid on a long-term and continuing basis which we
termed “development aid” Recipients are defined as any (developed or developing) country
that becomes a final destination of any short (humanitarian) or long-term (development) aid.
Development aid should come from a foreign country, sponsored and distributed either by
their government or a non-governmental organization.
 Society and Country are similar, but only as long as that country means the territory of a
nation that represents a nation-state. In other words, country refers to the politically and
territorially sovereign entity of a nation-state and society refers to the people and their political
organization within that nation-state.
 Development cooperation, a term used, for example, by the World Health Organization
(WHO), is used to express the idea that a partnership should exist between donor and
recipient, rather than the traditional situation in which the relationship was dominated by the
wealth and specialized knowledge of one side.

Effectiveness
There is significant disagreement about the degree of effectiveness of development aid. Many econometric
studies in recent years have supported the view that development aid has no effect on the speed with
which countries develop. Negative side effects of aid can include an unbalanced appreciation of the
recipient's currency (known as Dutch Disease), increasing corruption, and adverse political effects such as
postponements of necessary economic and democratic reforms
Dissident economists such as Peter Bauer and Milton Friedman argued in the 1960s that aid is ineffective:
Development aid is often uncoordinated and unsustainable. Developed nations are more likely to give aid
to nations who have the worst economic situations. They give money to these nations so that they can
become developed. In addition, the smaller a nation is, the more likely it is to receive funds from donor
agencies. The harsh reality of this is that it is very unlikely that a developing nation with a lack of resources,
policies, and good governance will be able to utilize incoming aid effectively and begin to create a healthy
economy. It is more likely that a nation with good economic policies and good governance will be able to
utilize aid money to help the country establish itself with an existing foundation and be able to rise from
there with the help of the international community. However, it is the low-income nations that tend to
receive aid, and the better off a nation is, the less aid money it will be granted.

Corruption
Researchers at the Overseas Development Institute have highlighted the need to tackle corruption with, but
not limited to, the following methods:
1. Resist the pressure to spend aid rapidly.
2. Continue to invest in audit capacity, beyond simple paper trails;
3. Establish and verify the effectiveness of complaints mechanisms, paying close attention to
local power structures, security and cultural factors hindering complaints;
4. Clearly explain the processes during the targeting and registration stages, highlighting points
such as the fact that people should not make payments to be included, photocopy and read
aloud any lists prepared by leaders or committees .

Analysis of the Problem

The problems incurred in the history of development aid have a number of sources, but the most significant
may well be differences in culture. In recent times economists have been forced to recognize the
importance of culture:
If a Central Asian example could serve as a “generic” solution, then it can be said that the only chance for
these societies to successfully receive development aid is to deal with somebody closer to them on the D-
curve, such as another Asian society. South Korea is one possibility, and, in fact, Daewoo has a monopoly
in the auto industry in Uzbekistan. An even better option is Russia where, for each Central Asian republic,
historical, cultural, language, and cognitive similarity has been made similar (sometimes by force) during
the seven decades of the Soviet empire.

What is trade war? How does it work?

d. Business, Banking & Investment

How do banks works?

A Bank is a financial institution licensed to receive deposits and make loans. Banks may also
provide financial services, such as wealth management, currency exchange and safe deposit boxes.
There are two types of banks: commercial/retail banks and investment banks. In most countries,
banks are regulated by the national government or central bank.

BREAKING DOWN 'Bank'

 Commercial bank are typically concerned with managing withdrawals and

receiving deposits as well as supplying short-term loans to individuals and small
businesses. Consumers primarily use these banks for basic checking and savings
accounts, certificates of deposit (CDs) and home mortgages. Examples of
commercial banks include JPMorgan Chase & Company and Bank of America
Corporation.
 Investment bank focus on providing corporate clients with services such as
underwriting and assisting with merger and acquisition (M&A) activity. Morgan
Stanley and Goldman Sachs Group Inc. are examples of U.S. investment banks.
 Central banks are chiefly responsible for currency stability, controlling inflation
and monetary policy and overseeing money supply. Several of the world's major
central banks include the U.S. Federal Reserve Bank, the European Central Bank,
the Bank of England, the Bank of Japan, the Swiss National Bank and the People’s
Bank of China.
While many banks have both a brick-and-mortar and online presence, some banks have only an
online presence. Online-only banks often offer consumers higher interest rates and lower fees.
Convenience, interest rates and fees are the driving factors in consumers' decisions of which bank
to do business with. As an alternative to banks, consumers can opt to use a credit union.

What is inflation and how does it happen?

Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation
— and avoid deflation — in order to keep the economy running smoothly. generally measured in
terms of a consumer price index (CPI), which tracks the prices of a basket of core goods and
services over time.Inflation is one of the primary reasons that people invest in the first place.

Causes of Inflation
Consumer Confidence: When unemployment is low and wages are stable, consumers are more confident
and more likely to spend money. This confidence drives up prices as manufacturers and providers charge
more for goods and services that are in high demand. One example is the market for new housing.
Decreases in Supply:When fewer items are available, consumers are willing to pay more to obtain the item.
Supply decreases for several reasons. Oftentimes a natural disaster or environmental effect is at fault for a
supply-chain interruption, such as when a tornado destroys a factory or a severe drought kills crops.
Supplies also decrease when an item is immensely popular, a phenomenon that frequently is seen when
new cellphones or video games are released.
Corporate Decisions: Sometimes inflation happens naturally as supplies decrease and demand increases,
but other times it is orchestrated by corporations. Companies that make popular items frequently raise
prices simply because consumers are willing to pay the increased amount. Corporations also raise prices
freely when the item for sale is something consumers need for everyday existence, such as oil and gas.
Decisions made by business owners can cause inflation even when it wasn't the intended effect. Farmers
often decide to thin their cattle herds when the price of feed increases. That decision saves the farmers
money, but it means that less beef is available for sale, driving up the price and sparking inflation. (For
related reading, see: Inflation's Impact on Stock Returns.)

How do central banks control inflation?

There are many methods used to control inflation; some work well while others may have damaging effects.
For example, controlling inflation through wage and price controls can cause a recession and cause job
losses.
Contractionary Monetary Policy
One popular method of controlling inflation is through a contractionary monetary policy. The goal of a
contractionary policy is to reduce the money supply within an economy by decreasing bond prices and
increasing interest rates. This helps reduce spending because when there is less money to go around,
those who have money want to keep it and save it, instead of spending it. It also means that there is less
available credit, which can also reduces spending. Reducing spending is important during inflation,
because it helps halt economic growth and, in turn, the rate of inflation.
There are three main tools to carry out a contractionary policy. The first is to increase interest rates through
the central bank, in the case of the U.S., that's the Federal Reserve. The Fed Funds Rate is the rate at
which banks borrow money from the government, but, in order to make money, they must lend it at higher
rates. So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their
rates as well. When banks increase their rates, fewer people want to borrow money because it costs more
to do so while that money accrues at a higher interest. So, spending drops, prices drop and inflation slows.
Reserve Requirments
The second tool is to increase reserve requirements on the amount of money banks are legally required to
keep on hand to cover withdrawals. The more money banks are required to hold back, the less they have to
lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending.
Reducing the Money Supply
The third method is to directly or indirectly reduce the money supply by enacting policies that encourage
reduction of the money supply. Two examples of this include calling in debts that are owed to the
government and increasing the interest paid on bonds so that more investors will buy them. The latter
policy raises the exchange rate of the currency due to higher demand and, in turn, increases imports and
decreases exports. Both of these policies will reduce the amount of money in circulation because the
money will be going from banks, companies and investors pockets and into the government’s pocket where
it can control what happens to it.

What is a ‘fiscal policy’?

Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic
conditions, including aggregate demand, employment, inflation and economic growth.
iscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and
influence a nation's economy. It is the sister strategy to monetary policy through which a central bank
influences a nation's money supply. These two policies are used in various combinations to direct a
country's economic goals. Here we look at how fiscal policy works, how it must be monitored and how its
implementation may affect different people in an economy.

Before the Great Depression, which lasted from Oct. 29, 1929, to the onset of America's entry into World
War II, the government's approach to the economy was laissez-faire. Following World War II, it was
determined that the government had to take a proactive role in the economy to regulate unemployment,
business cycles, inflation and the cost of money. By using a mix of monetary and fiscal policies (depending
on the political orientations and the philosophies of those in power at a particular time, one policy may
dominate over another), governments can control economic phenomena.

How Fiscal Policy Works

Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian
economics, this theory basically states that governments can influence macroeconomic productivity levels
by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally
considered to be healthy when between 2-3%), increases employment and maintains a healthy value of
money. Fiscal policy plays a very important role in managing a country's economy. For example, in 2012
many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government spending set
to occur in January 2013, would send the U.S. economy back into recession. The U.S. Congress avoided
this problem by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013.

Balancing Act
The idea is to find a balance between tax rates and public spending. For example, stimulating a stagnant
economy by increasing spending or lowering taxes runs the risk of causing inflation to rise. This is because
an increase in the amount of money in the economy, followed by an increase in consumer demand, can
result in a decrease in the value of money -- meaning that it would take more money to buy something that
has not changed in value.

Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down,
and businesses are not making substantial profits. A government may decide to fuel the economy's engine
by decreasing taxation, which gives consumers more spending money, while increasing government
spending in the form of buying services from the market (such as building roads or schools). By paying for
such services, the government creates jobs and wages that are in turn pumped into the economy. Pumping
money into the economy by decreasing taxation and increasing government spending is also known as
"pump priming." In the meantime, overall unemployment levels will fall.

With more money in the economy and less taxes to pay, consumer demand for goods and services
increases. This, in turn, rekindles businesses and turns the cycle around from stagnant to active.

If, however, there are no reins on this process, the increase in economic productivity can cross over a very
fine line and lead to too much money in the market. This excess in supply decreases the value of money
while pushing up prices (because of the increase in demand for consumer products). Hence, inflation
exceeds the reasonable level.

For this reason, fine tuning the economy through fiscal policy alone can be a difficult, if not improbable,
means to reach economic goals. If not closely monitored, the line between a productive economy and one
that is infected by inflation can be easily blurred.

When the Economy Needs to Be Curbed …

When inflation is too strong, the economy may need a slowdown. In such a situation, a government can
use fiscal policy to increase taxes to suck money out of the economy. Fiscal policy could also dictate a
decrease in government spending and thereby decrease the money in circulation. Of course, the possible
negative effects of such a policy, in the long run, could be a sluggish economy and high unemployment
levels. Nonetheless, the process continues as the government uses its fiscal policy to fine-tune spending
and taxation levels, with the goal of evening out the business cycles.

Who Does Fiscal Policy Affect?

Unfortunately, the effects of any fiscal policy are not the same for everyone. Depending on the political
orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically
the largest economic group. In times of economic decline and rising taxation, it is this same group that may
have to pay more taxes than the wealthier upper class.

Similarly, when a government decides to adjust its spending, its policy may affect only a specific group of
people. A decision to build a new bridge, for example, will give work and more income to hundreds of
construction workers. A decision to spend money on building a new space shuttle, on the other hand,
benefits only a small, specialized pool of experts, which would not do much to increase aggregate
employment levels.

That said, the markets also react to fiscal policy. Stocks rose on Dec. 21, 2017 for the first time in three
days following passage of the Trump administration's $1.5 trillion U.S. tax bill, the "Tax Cuts and Jobs Act."
The Dow Jones Industrial Average gained 99 points, or 0.4%, the S&P 500 Index rose 0.25%, and the
Nasdaq Composite Index was up 0.14%.

The tax overhaul is forecast to raise the federal deficit by hundreds of billions of dollars – and perhaps as
much as $2 trillion – over the next 10 years. Estimates vary depending on assumptions about how much
economic growth the law will spur. The law cuts corporate tax rates permanently by creating a single
corporate tax rate of 21% and repeals the corporate alternative minimum tax.

The law also retains the current structure of seven individual income tax brackets, but in most cases it
lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket
to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the
35% bracket is also unchanged. These changes are set to expire after 2025.

The Bottom Line

One of the biggest obstacles facing policymakers is deciding how much involvement the government
should have in the economy. Indeed, there have been various degrees of interference by the government
over the years. But for the most part, it is accepted that a degree of government involvement is necessary
to sustain a vibrant economy, on which the economic well-being of the population depends.

How does currency exchange works? What defines its value?

Exchange rates tell you how much your currency is worth in a foreign currency. Think of it as the price
being charged to purchase that currency. Foreign exchange traders decide the exchange rate for most
currencies. They trade the currencies 24 hours a day, seven days a week. This market trades $5.3 trillion a
day.
Prices change constantly for the currencies that Americans are most likely to use. They include Mexican
pesos, Canadian dollars, European euros, British pounds, and Japanese yen. These countries use flexible
exchange rates. The government and central bank don't actively intervene to keep the exchange rate fixed.
Their policies can influence rates over the long term. For most countries, the government can only
influence, not regulate, exchange rates.
You must plan for exchange rate values when you travel overseas. When the U.S. dollar is strong, you can
buy more foreign currency and enjoy a more affordable trip. If the U.S. dollar is weak, your trip will cost
more because you can't buy as much foreign currency. Since the exchange rate varies, you might find the
cost of your trip has changed since you started planning it. It's one of the ways exchange rates affect your
personal finances.
You can Google the U.S. dollar to foreign currency exchange rate to get today's rate. It also shows a chart
revealing whether the dollar is strengthening or weakening. If it's strengthening, you can wait until right
before your trip to buy your currency. Check to see if your credit card company charges conversion fees. If
not, then using your credit card overseas will get you the cheapest exchange rate. If the dollar is
weakening, you might want to buy the foreign currency now rather than waiting until you travel.
Banks charge a higher exchange rate, but it might be cheaper than what you'll pay in the future. Here are
the recent changes in the euro to dollar exchange rate.
Other currencies, like the Saudi Arabian riyal, rarely change. That's because those countries use fixed
exchange rates that only change when the government says so. These rates are usually pegged to the
U.S. dollar. Their central banks have enough money in their foreign currency reserves to control how much
their currency is worth. To keep the exchange rate fixed, the central bank holds U.S. dollars. If the value of
the local currency falls, the bank sells its dollars for local currency. That reduces the supply in the
marketplace, boosting its currency's value.
It also increases the supply of dollars, sending its value down. If demand for its currency rises, it does the
opposite.
The Chinese yuan used to be a fixed currency. Now the government is slowly transitioning to a flexible
exchange rate. That means it changes less frequently than a flexible exchange rate, but more frequently
than a fixed exchange rate. Here is the most recent yuan to dollar conversion rate.

Determinants of Exchange Rates

Numerous factors determine exchange rates. Many of these factors are related to the trading relationship
between two countries. Remember, exchange rates are relative, and are expressed as a comparison of the
currencies of two countries. The following are some of the principal determinants of the exchange rate
between two countries. Note that these factors are in no particular order; like many aspects of economics,
the relative importance of these factors is subject to much debate.
1. Differentials in Inflation
Typically, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing
power increases relative to other currencies. During the last half of the 20th century, the countries with low
inflation included Japan, Germany and Switzerland, while the U.S. and Canada achieved low inflation only
later. Those countries with higher inflation typically see depreciation in their currency in relation to the
currencies of their trading partners. This is also usually accompanied by higher interest rates.
2. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central
banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation
and currency values. Higher interest rates offer lenders in an economy a higher return relative to other
countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The
impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others,
or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing
interest rates – that is, lower interest rates tend to decrease exchange rates.
3. Current Account Deficits
The current account is the balance of trade between a country and its trading partners, reflecting all
payments between countries for goods, services, interest and dividends. A deficit in the current account
shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from
foreign sources to make up the deficit. In other words, the country requires more foreign currency than it
receives through sales of exports, and it supplies more of its own currency than foreigners demand for its
products. The excess demand for foreign currency lowers the country's exchange rate until domestic goods
and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for
domestic interests.
4. Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects and governmental
funding. While such activity stimulates the domestic economy, nations with large public deficits and debts
are less attractive to foreign investors. The reason? A large debt encourages inflation, and if inflation is
high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt, but increasing the
money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through
domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of
securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to
foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own
securities denominated in that currency if the risk of default is great. For this reason, the country's debt
rating (as determined by Moody's or Standard & Poor's, for example) is a crucial determinant of its
exchange rate.
5. Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the
balance of payments. If the price of a country's exports rises by a greater rate than that of its imports, its
terms of trade have favorably improved. Increasing terms of trade shows greater demand for the country's
exports. This, in turn, results in rising revenues from exports, which provides increased demand for the
country's currency (and an increase in the currency's value). If the price of exports rises by a smaller rate
than that of its imports, the currency's value will decrease in relation to its trading partners.
6. Political Stability and Economic Performance
Foreign investors inevitably seek out stable countries with strong economic performance in which to invest
their capital. A country with such positive attributes will draw investment funds away from other countries
perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable countries.

What is ‘shadow bank’?

What is ‘peer to peer lending’?

Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money
without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the
middleman from the process, but it also involves more time, effort and risk than the general brick-and-
mortar lending scenarios.P2P lending is also known as social lending or crowdlending.
Based on Peraturan OJK nomor 77/POJK.01/2016. Ex: koinworks,Investree, Modalku.
Purpose: Pinjaman Bisnis (Business Loan), Pinjaman Kesehatan (Health Loan) atau pun Pinjaman
Pendidikan (Education Loan).

BREAKING DOWN 'Peer-To-Peer Lending (P2P)'

Traditionally, individuals and small businesses who want a loan usually apply for one through the
bank. The bank would run extensive financial checks on the applicant’s credit history to determine if the
entity would qualify for a loan and if yes, determines the interest rate that will be charged on the loan.
Individuals that want to avoid being charged high interest rates or that would otherwise be rejected for a
loan application due to poor credit history, may opt for an alternative way of borrowing funds – peer-to-peer
lending.

1. Upstart
Upstart, a venture by ex-Googlers, is a peer-to-peer lending platform with a difference. It was founded in
2012 by Dave Giround, along with Paul Gu and Anna M. Counselman as co-founders. According to
Upstart, “You are more than your credit score. On Upstart, your education and experience help you get the
rate you deserve.” Thus loan eligibility is decided on factors that go beyond the FICO score, such as the
school of graduation, academic performance, area of study and work history. Upstart offers loans starting
from a minimum of $1,000 to a maximum of $50,000 at an annual percentage rate (APR) starting at 8.85%.
Upstart offers loans for almost everything, be it for repaying a student loan or attending a boot camp, for
buying a car or paying medical bills to supporting a business. Upstart has become increasingly popular with
the younger generation (20s and 30s) who don’t have a long credit history, making it hard to get a loan
based on conventional criteria, but who have the potential to honor the commitment.
2. Lending Club
Founded in 2007 by Renaud Laplanche, Lending Club Corporation is a premier player in the peer-to-peer
lending space. Lending Club is a giant in the online market place that connects lenders and borrowers; the
total loans issued as of March 2018 amounted to $35,940,013,016. Lending Club caters to loans for various
purposes like personal finance (consolidate debt, pay off credit cards, home improvement and pool loans),
business loans, patient financing (dentistry, fertility, hair and bariatric), as well as for investing. The
minimum personal loan amount offered is $1,000 ($15,000 for businesses), going to a maximum of $40,000
($300,000 for business). This popular brand became the first publicly traded online peer-to-peer lending
company in the U.S., with its successful initial public offering (IPO) on the NYSE in December 2014. The
company currently has a market capitalization of 1.853 billion.
There are many other popular P2P platforms other than the ones mentioned in the list above, like
Zopa in the U.K., BorrowersFirst, Kiva, Pave and Daric. For the P2P platform, borrowers and lenders alike,
the system has worked wonders. As for revenues, the P2P platform generates them through origination
fees charged to borrowers and partially from interest charged to investors as service fees. The investors
generate revenue from the remaining portion of the interest that the borrowers pay on loans. As for
borrowers, they benefit from easy access to loans at decent rates, small loans for specialized purposes,
faster and smoother procedures, and benevolence to small business ambitions.
Because each state has its own regulations with regard to lending, peer-to-peer lending is not allowed
everywhere. For example, Iowa, North Carolina, and New Mexico have constrained the ability to invest
through peer-to-peer platforms. Investors and borrowers should, therefore, ensure to check whether their
states permit P2P lending before registering with a P2P intermediary.

What is ‘angel investor’?

Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an
entrepreneur's family and friends. The capital angel investors provide may be a one-time investment to help
the business propel or an ongoing injection of money to support and carry the company through its difficult
early stages.
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the
entrepreneur starting the business rather than the viability of the business. Angel investors are focused on
helping startups take their first steps, rather than the possible profit they may get from the business. Angel
investors are the grass-roots foundation of commerce. They are not exactly the same as venture capitalists,
which also play an important role in the formation of businesses and commerce in the world. Most angel
investors are private individuals; most venture capital comes from partnerships that pool funds from wealthy
individuals, investment banks, endowments, pension funds, insurance companies, various financial
institutions and even other corporations.Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or
business angels. These are affluent individuals who inject capital for startups in exchange for ownership
equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build
angel investor networks to pool in capital.
Who Can Be Angel Investors?
Angel investors must meet the Securities Exchange Commission's (SEC) standards for accredited
investors. To become an angel investor, one must have a minimum net worth of $1 million and an annual
income of $200,000.
Source of Funding
Angel investors typically use their own money, unlike venture capitalists who take care of pooled money
from many other investors and place them in a strategically managed fund.
Though angel investors usually represent individuals, the entity that actually provides the fund may be a
limited liability company (LLC), a business, a trust or an investment fund, among many other kinds of
vehicles.
Investment Profile
Angel investors who seed startups that fail during their early stages lose their investments completely. This
is why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial
public offerings (IPOs).
The effective internal rate of returns for a successful portfolio for angel investors ranges from 20% to 30%.
Though this may look good for investors and seem too expensive for entrepreneurs with early-stage
businesses, cheaper sources of financing such as banks are not usually available for such business
ventures. This makes angel investments perfect for entrepreneurs who are still financially struggling during
the startup phase of their business.

What is ‘venture capital’?

Venture capital is financing that investors provide to startup companies and small businesses that are
believed to have long-term growth potential. Venture capital generally comes from well-off investors,
investment banks and any other financial institutions. However, it does not always take just a monetary
form; it can be provided in the form of technical or managerial expertise.
Though it can be risky for the investors who put up the funds, the potential for above-average returns is an
attractive payoff. For new companies or ventures that have a limited operating history (under two years),
venture capital funding is increasingly becoming a popular – even essential – source for raising capital,
especially if they lack access to capital markets, bank loans or other debt instruments. The main downside
is that the investors usually get equity in the company, and thus a say in company decisions.

What is a 'Venture Capitalist'

A venture capitalist is an investor who either provides capital to startup ventures or supports small
companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to
invest in such companies because they can earn a massive return on their investments if these companies
are a success.
Venture capitalists also experience major losses when their picks fail, but these investors are typically
wealthy enough that they can afford to take the risks associated with funding young, unproven companies
that appear to have a great idea and a great management team.

BREAKING DOWN 'Venture Capitalist'

Well-known venture capitalists include Jim Breyer, an early Facebook (FB) investor, Peter Fenton, an
investor in Twitter (TWTR), Peter Theil, the co-founder of PayPal (PYPL) and Facebook's first investor,
Jeremy Levine, the largest investor in Pinterest, and Chris Sacca, an early investor in Twitter and ride-
share company Uber.
Venture capitalists look for a strong management team, a large potential market and a unique product or
service with a strong competitive advantage. They also look for opportunities in industries that they are
familiar with, and the chance to own a large percentage of the company so that they can influence its
direction.
Structure
Wealthy individuals, insurance companies, pension funds, foundations, and corporate pension funds may
pool money together into a fund to be controlled by a VC firm. All partners have part ownership over the
fund, but it is the VC firm that controls where the fund is invested, usually into businesses or ventures that
most banks or capital markets would consider too risky for investment. The venture capital firm is the
general partner, while the pension funds, insurance companies, etc. are limited partners.
Compensation
Payment is made to the venture capital fund managers in the form of management fees and carried
interest. Depending on the firm, roughly 20% of the profits are paid to the company managing the private
equity fund, while the rest goes to the limited partners who invested into the fund. General partners are
usually also due an additional 2% fee.

Advantages of Venture Capital

They bring wealth and expertise to the company
Large sum of equity finance can be provided
The business does not stand the obligation to repay the money
In addition to capital, it provides valuable information, resources, technical assistance to make a business
successful
Disadvantages of Venture Capital
As the investors become part owners, the autonomy and control of the founder is lost
It is a lengthy and complex process
It is an uncertain form of financing
Benefit from such financing can be realized in long run only
Exit route
There are various exit options for Venture Capital to cash out their investment:

Inventus Capital Partners

With the sole goal of making new entrepreneurs successful, Inventus is a venture capital fund managed by
entrepreneurs and industry-operating veterans.
People You Should Know: Samir Kumar and Kanwal Rekhi
Investment Structure: The firm does not invest in capital intensive companies. It typically leads the first venture
round with $1 Mn to $2 Mn and as the businesses grow, it invests from $0.25 Mn up to $10 Mn.
Industries: Consumer, Hotels, Restaurants and Leisure, Media, Internet and Catalog Retail, Healthcare, Information
Technology, Hardware and Equipment, Telecommunications etc.
Startups Funded: Poshmark, Savaari, Farfaria, Policy Bazaar.com, Insta Health Solutions, CBazaar.

Alibaba group by jack ma got vc in 1999, developing till trillion dollar company and build vc yunfeng capital.

e. Current Issues

What is gentrification? What are its forms?

Gentrification is the process of urban development wherein a neighborhood or portion of a city develop in a
short period of time. This is often marked by inflated home prices and the displacement of the original
residents.
Gentrification has been the cause of painful conflict in many American cities, often along racial and
economic fault lines. Neighborhood change is often viewed as a miscarriage of social justice, in which
wealthy, usually white, newcomers are congratulated for "improving" a neighborhood whose poor, minority
residents are displaced by skyrocketing rents and economic change.
Although there is not a clear-cut technical definition of gentrification, it is characterized by several changes.
Demographics: An increase in median income, a decline in the proportion of racial minorities, and a
reduction in household size, as low-income families are replaced by young singles and couples.
Real Estate Markets: Large increases in rents and home prices, increases in the number of evictions,
conversion of rental units to ownership (condos) and new development of luxury housing.
Land Use: A decline in industrial uses, an increase in office or multimedia uses, the development of live-
work "lofts" and high-end housing, retail, and restaurants.
Culture and Character: New ideas about what is desirable and attractive, including standards (either
informal or legal) for architecture, landscaping, public behave
 The two sides of 'Gentrification'
Gentrification has become a controversial term in the recent years. It was once thought to have a positive
effect on areas where economic growth had stagnated or decreased. However, these days it is seen by
some as part of a larger racial issue. Although gentrification of urban areas generally brings increased
economic growth to the area, it displaces the original lower income residents, many of whom have lived
there for generations. Once the areas have been improved upon to attract more affluent residents, the
original population must relocate to a less desirable low income or high crime area. The effect isn’t just felt
on residential residents, as smaller retail shops and industrial complexes can be displaced in the process
as well.

Recent examples of gentrification can be found all over the country. In Pennsylvania, the Fishtown section
of Philadelphia has recently experienced a large rate of development and growth. Just a decade ago, most
of the row homes in the area were selling for under $100,000. These days some of the same houses are
being sold for upwards of $300,000. This is in large part due to investors and young business professionals
taking advantage of the lower real estate costs, purchasing businesses and homes, and then making
improvements that allow them to resell them for a profit. This is commonly known as flipping, and it can
create a rapid increase in real estate values. This can create a property value bubble, which when it bursts,
could leave homeowners with properties whose values have decreased over time. This puts homeowners
in a position where they may owe more on a property than it is worth and may be unable to sell the property
now that the demand in the neighborhood has leveled out. It can also cause potential new residents to be
priced out of a now-desirable area.

What is “preferential treatment” and its relation with tax?

Preferential Trade Agreements, or PTAs, are formal arrangements of trade between countries that see benefits from trade
amongst themselves. In many cases, these benefits are the product of proximity; countries close to one another are better
able to conduct trade both because of lower transportation costs and greater possibilities for transparency. When trade
agreements are constructed in this regional manner, they are sometimes referred to as Regional Trade Agreements, or
RTAs. There is much debate as to whether PTAs increase or divert trade. The basic principles behind these two arguments
are that while PTAs may foster trade that would otherwise not exist, they also have the potential to capture trade that would
otherwise take place with members outside of the PTA and away from the lowest cost producer. Ideally, trade creation
should outweigh trade diversion.
Example:
Pakistan and Indonesia

27 jan 2018,Additional Protocol to PTA for 20 new tariff lines, Trade facilitation. An agreement was also signed by
Foreign Service Academy and Centre of Training and Education Indonesia.

f. Labor

What is labor union? How do labor unions work?

A labor union, also called a trade union, is an organization that represents the collective interests of
workers. The labor union helps workers unite to negotiate with employers over wages, hours, benefits and
other working conditions. Labor unions are often industry-specific and tend to be more common in
manufacturing, mining, construction, transportation, and the public sector. However, while beneficial to its
members, labor union representation in the United States has declined significantly in the private sector
over time.
A labor union or trade union is an organized group of workers who unite to make decisions about
conditions affecting their work. Labor unions strive to bring economic justice to the workplace and
social justice to our nation.
Who are Union Members?

There are over 60 unions representing over 14 million workers throughout the country.No matter what work you do,
there's a union that represents your work, including

Teachers  Farm workers

 Miners  Bakers
 Firefighters
  Engineers  Bus drivers,
 Pilots  Office workers
 Public employees  Computer professionals and more are
 Doctors all union members
 Nurses
 Plumbers,
Benefits of Belonging to a Union

Higher pay, better benefits, and a voice on the job. These are the main reasons to join union. As a
union member, you have a collective voice regarding:

 Pay and wages

 Work hours
 Benefits - including retirement plans, health insurance, vacation and sick leave, tuition
reimbursement, etc.
 Working conditions
 Workplace health and safety
 Ways to balance work and family
 The best ways to get work completed, and other work-related issues

How do Unions Work?

Unions work like a democracy. They hold elections for officers who make decisions on behalf
of members, giving workers more power on the job.A local union is a locally-based group of
workers with a charter from a national or international union such as the Service Employees
International Union (SEIU) or United Auto Workers (UAW). A local may include workers from
the same company or region. It may also have workers from the same business sector,
employed by different companies.

The National Labor Relations Act, also known as the Wagner Act, guarantees private sector
employees the right to form labor unions. The act also gives unionized employees the right
to strike and to jointly bargain for working conditions.

Two large organizations oversee most of the labor unions in the U.S.: the Change to Win
federation (CtW) and the American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO). The AFL-CIO formed in 1955 after the two groups merged and
has nearly 20 million members. The CtW spun off from the AFL-CIO in 2005. Labor unions
exist in many nations around the globe, including Sweden, Germany, France, and the United
Kingdom. Many large unions will actively lobby legislators, on both a local and federal level,
to achieve goals they see as beneficial to their membership.

An Example of a Labor Union

Nearly all unions are structured the same way and carry out duties in the same manner. The
National Education Association (NEA), for example, is a labor union of professionals that
represents teachers and other education professionals in the workplace. NEA is the largest
labor union in the United States, boasting nearly 3 million members. The union's aim is to
advocate for education professionals and unite its members to fulfill the promise of public
education.

The NEA works with local and state educational systems to set adequate wages for its
members, among other things. When negotiating salaries on behalf of its teachers, NEA
starts with a bargaining unit. This unit is a group of members whose duty it is to deal with a
specific employer. The bargaining unit, as its name implies, works with an employer to
negotiate and assure that its members are properly compensated and represented.

U.S. law requires the employer, in this case, a school district, to actively bargain with the
union in good faith. However, the employer is not required to agree to any specific terms.
Multiple negotiation rounds are conducted between the bargaining party and the employer,
after which a collective bargaining agreement (CBA) is agreed upon and signed. The CBA
outlines pay scales and includes other terms of employment, such as vacation and sick
days, benefits, working hours, and working conditions.

After signing the CBA, an employer cannot change the agreement without a union
representative's approval. However, CBAs eventually expire. At the expiration of a collective
bargaining agreement, the labor union must negotiate and both parties must sign a new
agreement.