Underground Economics

Do you want to build your career in the underground economy? Do you want to gather some data to write a quality paper? This helpful content can assist you with both tasks.  This guide covers the different aspects of this field.  If you want to do higher studies in this field, you need to gather all the knowledge you can. This way, you will be able to make a better decision regarding your higher studies or career.

Definition of Underground Economy 

So, what exactly is the underground economy? It comprises of the illegal economic transactions because either the traded services or goods are illegal, or because the transaction does not obey the governmental reporting requirements of the said country.

This economy is also called the shadow, black, or informal economy.  This economy generally consists of the selling of street drugs or prostitution. Other examples of illegal activities inside the underground economy include gambling, unreported income from some kind of self-employment, struggling, etc.

Those individuals who work in the underground economy do not disclose their incomes, and thus, none of their official reports remains with the tax authorities. Human trafficking, copyrighted materials, antiquities, endangered animal species, illegally gathered human organs’ market, etc. all fall under this specific economy.

How Underground Economy Works

Even though Economists do not agree regarding the underground economy’s size, but they agree on the fact that the GDP or Gross Domestic Product is affected by an economy’s size.  Along with this, figures and other major economic measurements get affected by the size of this economy.  

The underground economy or the shadow economy is also connected with criminal activities like prostitution, gambling, etc. But, this economy is much bigger than the completely criminal monetary transactions.

In this economy, there are also many unreported incomes earned from carrying out different activities like roofing repairing. Here, the payment is done under the table, which is why these go unrecorded. Other than this, the various elements of this economy include unreported work and income of migrant or illegal aliens workers, selling stolen goods, unreported tip income, etc. Another increasing part of this economy is the unemployed professionals who do unrecorded or illegal work just to survive financially.  

The Relation Between GDP and Underground Economy

Four components are added to calculate GDP, which are business spending, net exports, personal spending, and government spending. The shadow economy usually consists of transactions that form unreported personal and business spending.

It is estimated that the underground economy builds up almost one-third of developing countries’ total economy.  In developed countries, this economy builds up 10% of the total economy.  

 How underground markets grow?

According to black market definition, it involves the economic activity that occurs outside the channels that are government sanctioned. But, how are these markets or economy is flourishing?

The main reason behind this is the weak fundamentals of the economy. A huge underground economy arises when a country has a high rate of inflation and low currency reserves. Black markets also arise when the domestic currency has decreased at a higher level when compared with another currency. Especially in the developing countries and the nations that are facing significant economic turmoil, the underground economy thrives.

It is quite interesting to know that often people do not realize that they are taking part in black market transactions. For example, if you have ever bought sold-out match’s ticket by paying much more than the original price, then you have involved yourself in an underground economy transaction.  In fact, people in developing countries might partake in a black market transaction to obtain essential medicines.

Effects of an underground economy

The main concern regarding the impact of an underground economy on the GDP is that by providing an incorrect figure of GDP, the GDP based government policies get badly affected.

You can find both positive and negative effects of an underground economy. This economy negatively affects the economic policy-making process. The macroeconomic aggregates that have been measured like income level, unemployment rate, etc. become untrustworthy. Due to this, the economic policy based on this is probably ineffective.

Another significant negative effect is that it affects the fiscal health of a state. There are some theories that state that if the manifestation of the underground economy were controlled by the governments, several fiscal issues of the public sector like debt could have been reduced.

On the other hand, from a microeconomic perspective, the underground economies have important advantages over the official firms from which unfair competitive conditions are created.

Here is a list of the negative effects of an underground economy:

• Issues like corruption, drugs, black money laundering, mafia, etc. are boosted by underground economics
• Inadequate macroeconomic strategy because this specific economy gives out false signals and encourages decision makers.
• Deceptive tax burden results in tax injustice
• Loss of welfare
• Incorrect macroeconomic policy on unemployment, social security, tax system, etc.
• Over-reported unemployment rates
• Insufficient taxation which gives birth to a budget deficit
• Growth rate and GNP which are unreported
• Digression from economic policies
• Increased corruption in society
• Insufficient reporting in import, export, and indicators of current balance
• Insufficient evaluation of creditworthiness because of insufficient financial reporting
• Unfair competition
• Unfair distribution of income

Although underground economies have a long list of negative effects, it also has positive impacts on a registered economy. Some of the positive impacts are listed below:

• It has a strong economy that enables it to take in potential political and economic shocks
• Leads to low-cost production and flexibility in the working conditions
• It plays the role of a ‘social relief valve’ at the time of crises via producing employment  and opportunities regarding income, which ultimately increases the supply
• Bringing dynamism in the economy and  generates reasons for the accumulation and growth of  capital

The informal economy affects the general economy in both positive and negative ways.

Underground economy examples 

An example of an underground economy can be noticed in the hospitality industry. As a lot of cash transaction occurs in underground economy, the above-mentioned industry is one of the places where frequent shadow transactions take place. One example can be of an instance when one gives a tip to the waiter. This transaction does not get showed up in your taxes.

Another example of underground economics activities can be illegal trading of drugs. Likewise, other industries in which the underground economy persists are retail, online auctions, gambling, construction, and babysitting.  

Statistics of underground economy

It has been found out in a study by IMF that the average size of an underground economy in the studied 158 countries in the period between 1991 and 2015 is 31.9 percent. The largest ones are the economy of Bolivia (62.3%) and Zimbabwe (32.9%).

So, this is a handful of knowledge of underground income. You can use it to enhance your level of knowledge or write a stellar paper on the same topic.

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