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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.