How The Underground Economy Effects Gross Domestic Product

1158 words - 5 pages

From the past mobsters swarming New York City, to the modern day thugs in today’s contemporary world, the informal economy or more commonly known as the underground economy has existed. The Informal economy has been an issue that many economists cannot distinguish as to whether it will positively or negatively have an impact on our world then or today. The informal sector of the economy includes ranges to a variety of different goods and services that are not recorded, legal, or illegal. Some illegal activities involve the purchase, sale, and transport of drugs in addition to prostitution and guns, while others are conduct off the book transactions, “which is income from legal sources, often found in the construction and services industries, where taxes are not withheld or paid” (Grammy, 2011). The underground economy is one of the many shortcomings of the Gross Domestic Product (GDP), the market value of all final goods and services produced within a country, which create complications for one to accurately measure the wellbeing of the economy. The greater the size of the underground economy, the smaller the Gross Domestic Product is. The Informal economy possesses a negative effect on the economy of the United states, and other developing countries, thus effecting the Gross Domestic Product by misrepresenting the employment rate of that economy, damaging developing countries, and citizens not contributing to taxes that leads to the depleting of our world.
The Gross Domestic Product has many shortcomings associated with it, leading people to believe it is not accurate when measuring the overall economic well-being. With the informal economy on the rise, the underground sector is almost 10 percent of the GDP, and in European countries, the underground economy averages approximately 25 percent of GDP ("The underground economy," 2013). The result of having an underground sector a tenth of our Gross Domestic Product is the misrepresentation of our nation’s employment rate. Currently, our nation is slowly recovering from a recession that occurred in the recent past. We see this recovery in employment rates. As employment rates increase, it appears as though our economy is recovering, and we are entering into the intermediate range of the Aggregate Supply Curve, but who is to say the country has not already been in this range, and our economy is further out of the recession than was anticipated. In the black market, many people such as drug dealers and prostitutes do not disclose to the government they are in fact, illegally employed, so they are perceived as unemployed, causing our employment rate to diminish. With the informal sector of the economy being the size that it is, it is impossible to determine the real measure of the economy.
In addition, the informal sector of the economy harms developing countries, which then leads to a decrease in the Gross Domestic Product. There are many other reasons as to why there is an informal...

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