The underground economy refers to illegal or unreported economic activities that avoid regulatory guidelines. It negatively impacts the official economy by excluding its activity from GDP, reducing tax revenue, and indicating weak rule of law that discourages foreign investment. Crime rates fall when individual incomes rise because needs are met and people want to participate legally in the mainstream economy.
1. What is the underground economy and what is its effect on the eco.pdf
1. 1. What is the underground economy and what is its effect on the economy?
2. Why does crime falls when income rises?
Solution
1.
Underground economy refers to those economic activities that are either illegal in nature or are
performed to evade the guidelines of the regulatory authorities. For example, the trading of drugs
in the economy that is already banned by the government, constitute the underground economy.
On a similar note, the cash transaction to buy or sell real estate property that is neither reported,
nor tax paid to the concerned authorities, is also considered to be the part of the underground
economy.
The underground economy negatively affects the economy in following ways:
A. The economic activity of the underground economy is not included in GDP calculations. So,
it undermines the overall size of the GDP of the economy.
B. It is illegal and increasing the size of underground economy means more people are getting
trapped and susceptible to penal action of the authorities.
C. It prevents government to get the tax revenue what the government should get. So it harms
the economy.
D. It is a symbol of anarchy and dissatisfaction in the society, affecting negatively the
economy.
E. It reflects the poor control, law and authority in the country, affecting the FDIs in the
country.
2.
When income rises, then every needs and wants of the individual are fulfilled and the person
wants to abide by the laws. As a result, the person wants to be the part of mainstream economy
and prevents himself from the crime. Thus, crime rate comes down.
It is the reason that the government creates programs to improve income equality and spread its
benefits to most of the population as it curbs the crime rate.